Dow falls more than 400 points, Nasdaq finishes 2.2% lower as Treasury yields keep surging

What happened

• The Dow Jones Industrial Average
  DJIA,
  -1.19%
  finished 413.04 points, or 1.2%, lower at 34,308.08. It was the Dow industrials’ largest one-day point and percentage drop since March 31, according to Dow Jones Market Data.

• The S&P 500
  SPX,
  -1.69%
  closed down by 75.75 points, or 1.7%, at 4,412.53. It was the index’s largest one-day point and percentage decline since March 7.

• The Nasdaq Composite
  COMP,
  -2.18%
  finished 299.04 points, or 2.2%, lower at 13,411.96.

What drove markets

Investors continued to digest the implications of a likely half-point rate hike from the Federal Reserve in May, along with a more rapid unwinding of the central bank’s balance sheet than in the past, as policy makers attempt to rein in inflation that’s at a 40-year high. Tuesday’s annual headline inflation reading, contained in the consumer-price index report for March, is expected to exceed 8%.

Read: Worries grow that 8% inflation, more Fed comments on balance-sheet runoff could ‘scare the bond market witless again’

The yield on the 10-year Treasury
TMUBMUSD10Y,
2.826%
rose 6.6 basis points to 2.78%, its highest level since Jan. 18, 2019, according to Dow Jones Market Data. Meanwhile, the 30-year climbed 7.5 basis points to 2.82%, the highest since May 21, 2019. Ten- and 30-year rates are up, respectively, for the seventh and sixth straight trading days. Yields move in the opposite direction to prices.

Rising bond yields are acting as a headwind for stocks, particularly tech and other growth stocks in which valuations are based on expected profit and cash flow far into the future. Higher yields on risk-free Treasurys mean those future flows are less valuable in present terms.

“Even if the US earnings season — which gets under way this week — reveals decent growth in profits, we doubt that expectations for earnings will continue to be revised higher,” said Oliver Allen, markets economist for Capital Economics. “This informs our forecast for meager gains in the U.S. stock market over the rest of this year,” Allen wrote in a note on Monday.

Ahead of bank earnings and inflation data later in the week, traders were left focusing on the health of the market.

Read: U.S. banks are facing body blows from Ukraine war and a slump in investment banking activity

Michael Darda, chief economist and market strategist at MKM Partners, said the S&P 500 is still above fair value even with the recent pullback. He said that for the equity risk premium — the earnings yield minus the bond yield — to move back to its five-year average, one of four things would have to happen: bond yields fall by around 100 basis points, earnings rise about 20%, the stock market falls about 17%, or some combination of the three.

“Our valuation work shows that financials remain the most attractive cyclical sector while healthcare is the most attractive defensive sector. High valuation tech across the capitalization structure remains an ‘avoid’ or a short, in our view,” said Darda.

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Meanwhile, Charles Evans, head of the Federal Reserve’s regional bank in Chicago, said a 50 basis point rate hike in May could now be “highly likely.”

Stocks in focus

• Elon Musk remained in the headlines after Twitter Inc.
  TWTR,
  +1.69%
  Chief Executive Parag Agrawal said the Tesla Inc.
  TSLA,
  -4.83%
  chief “has decided not to join our board.” Twitter had announced last week that Musk would join the board after regulatory filings revealed that he had become the social-media platform’s top shareholder. Twitter shares finished 1.7% higher.

• Shares of Shopify Inc.
  SHOP,
  +2.35%
  finished 2.4% higher after the Canada-based e-commerce software company said it was planning for a 10-for-1 split of its common stock, in an effort to make its shares “more accessible to all investors.”

• Veru Inc. shares VERU rose 182.3% after the biopharmaceutical company announced positive results from a Phase 3 trial of its oral COVID-19 treatment.

• SailPoint Technologies Inc. shares SAIL closed up 29.2% after the cybersecurity company confirmed an agreement to be acquired by private-equity firm Thoma Bravo in a deal valued at $6.9 billion.

• The impact of China’s lockdowns were on display as electric-vehicle maker Nio Inc. NIO said it would have to suspend production due to disruptions to its supply chain. Nio’s American depositary shares closed down 1.5%.

How other assets performed

• The ICE U.S. Dollar Index
  DXY,
  +0.06%,
  a measure of the currency against a basket of six major rivals, was up 0.2%.

• Oil futures retreated, with West Texas Intermediate crude for May delivery
  CLK22,
  +2.23%
  down $3.97, or 4%, to settle at $94.29 a barrel on the New York Mercantile Exchange. Gold for June delivery
  GCM22,
  +0.81%
  rose $2.60, or 0.1%, to settle at $1,948.20 an ounce.

• Bitcoin
  BTCUSD,
  +0.43%
  slumped 7.7% to trade near $39,829, plunging below $40,000 for the first time since March.

• The Stoxx Europe 600
  SXXP,
  -0.59%
  and London’s FTSE 100
  UKX,
  -0.67%
  finished down by 0.6% and 0.7%, respectively.

• Stocks slumped in Asia, with the Shanghai Composite
  SHCOMP,
  +0.69%
  ending 2.6% lower, while the Hang Seng Index
  HSI,
  +0.47%
  fell 3% in Hong Kong, and Japan’s Nikkei 225
  NIK,
  -1.70%
  shed 0.6%.

— Steve Goldstein contributed to this article.