Stocks closed broadly lower on Wall Street and Treasury yields rose Monday after surprisingly strong economic reports highlighted the Federal Reserve's difficult fight against inflation.
The S&P 500 fell 73 points, or 1.8%, to 3,999 — its third straight drop. The slide more than offset the index's gains last week. The Dow Jones Industrial Average dropped 1.4% and the tech-heavy Nasdaq composite slid 1.9%. Small-company stocks fell even more, sending the Russell 2000 index 2.8% lower.
Bond yields mostly climbed. The yield on the 10-year Treasury, which influences mortgage rates, rose to 3.59% from 3.49% late Friday.
The selling came as traders reacted to some better-than-expected economic snapshots. The services sector, which makes up the biggest part of the U.S. economy, showed surprising growth in November, according to the Institute for Supply Management. Reports on business orders at U.S. factories and orders for durable goods in October also rose more than expected.
The reports are positive for the broader economy, but they make the Fed's fight against inflation more difficult because it likely means the central bank will have to keep raising interest rates in order to bring down inflation.
"It's more of that 'good news is bad news,'" said Tom Martin, senior portfolio manager at Globalt Investments. The latest economic data "bolsters the idea that rates are going to be higher."
Meanwhile, China is lifting some of its most severe COVID-19 restrictions following protests across major cities. That has raised hopes that disruptions to manufacturing and trade will ease.
Most companies in the red
All told, roughly 95% of the stocks in the benchmark S&P 500 index were in the red, with technology companies, banks and retailers among the biggest weights on the market. Chipmaker Nvidia fell 1.6%, Bank of America slid 4.5% and Amazon dropped 3.3%.
V.F. Corp., which makes Vans shoes and The North Face outdoor gear, slid 11.2% for the biggest drop in the S&P 500 after warning investors that weak demand is crimping revenue. The company also announced the departure of its CEO.
Tesla fell 6.4% following reports that it may have to cut production in China because of weak demand.
Markets in Asia rose, while markets in Europe closed mostly lower.
Recession concerns persist
Inflation, rising interest rates and the potential for recessions throughout global economies are among the biggest concerns for investors. Wall Street has been closely watching corporate announcements and government reports to get a better sense of just how much damage is being done to the economy, as well as inflation's path ahead in 2023.
Investors are also weighing several international developments that could further unsettle a global economy that is already getting burned by stubbornly hot inflation.
Russia's ongoing invasion of Ukraine continues agitating an already volatile global energy market. U.S. crude oil prices bounced around before settling 3.8% lower after a group of world leaders agreed to a boycott of most Russian oil. They also committed to a price cap of $60 per barrel on Russian exports.
Oil and gas company stocks fell amid a broad pullback in energy prices, including an 11.2% slump in natural gas. Exxon Mobil fell 2.7%.
Investors are dealing with several crosscurrents of information. Demand may be weakening in some areas of the economy, but some sectors remain resilient. Employment remains a strong area of the economy as does overall consumer spending.
Fed in "hawkish, but awkward" position
Wall Street will get a weekly update on unemployment claims on Thursday. Investors will likely be more focused on the monthly report on producer prices, for November, from the government on Friday.
The Fed has been aggressively raising its benchmark interest rate in an effort to tame inflation. The strategy is intended to make borrowing more expensive and generally hit the brakes on consumer spending and the economy. The risk is that the policy could send the economy into a recession.
The Fed is in a very "hawkish, but awkward" position, said Gene Goldman, chief investment officer at Cetera Investment Management.
"All of this is playing into uncertainty," he said.
The Fed is meeting next week and is expected to raise interest rates by a half-percentage point, which would mark an easing of sorts from a steady stream of three-quarters of a percentage point rate increases. It has raised its benchmark rate six times since March, driving it to a range of 3.75% to 4%, the highest in 15 years. Wall Street expects the benchmark rate to reach a peak range of 5% to 5.25% by the middle of 2023.