Stocks slide as investors assess potential impact of U.S. government shutdown

Technology companies led a broad sell-off in stocks on Wall Street Tuesday, with investors assessing the impact of inflation and a political standoff in Washington that could trigger a government shutdown later this week. 

The S&P 500 stock index slumped 2%, its biggest drop since May, to close at 4,353 points. The Dow fell 569 points, or 1.6%, and the tech-heavy Nasdaq composite slid 2.8%, the index's sharpest decline since March.

Brian Price, head of investment management for Commonwealth Financial Network, said in an email that "increased expectations for inflation driven by the significant increase in energy prices has caused longer term interest rates to surge in a short period of time."

"The other issue that is challenging global equity markets today is the ongoing drama in Washington regarding the debt ceiling," he added. "In the end we would expect a deal to get done, but it appears as though both sides are a bit more entrenched compared to previous periods. 

Congress must reach an agreement by the end of Thursday — the last day of the fiscal year — or the federal government will officially close as of 12:01 a.m. on Friday. 

What the bond market is saying

The center of Wall Street's action was again in the bond market, where a swift rise in Treasury yields is forcing investors to reassess whether prices have run too high for stocks, particularly the most popular ones.

The yield on the 10-year Treasury note, a benchmark for many kinds of loans including mortgages, jumped to 1.53%. That's its highest level since late June, and up from 1.48% late Monday and 1.32% a week ago.

A rise in yields means Treasurys are paying more in interest, and that gives investors less incentive to pay high prices for stocks and other things that are riskier bets than super-safe U.S. government bonds. The recent upturn in rates has hit tech stocks particularly hard because their prices look more expensive than much of the rest of the market, relative to how much profit they're making.

Many tech stocks also got bid up recently on expectations for big profit growth far in the future. When interest rates are low, an investor isn't losing out on much by paying high prices for the stock and waiting years for the growth to happen. But when Treasurys are paying more in the meantime, investors are less willing.

This week's swoon for the market is reminiscent of an episode early this year when expectations for rising inflation and a stronger economy sent Treasury yields climbing sharply. The 10-year yield jumped to nearly 1.75% in March after starting the year around 0.90%. Tech stocks also took the brunt of that downturn.

Lingering threat 

Investors have been dealing with a choppy market in September as they try to gauge how the economic recovery will progress and how it will impact various industries. The S&P 500 is down 3.6% so far in September and is headed for its first monthly loss since January.

COVID-19 remains a lingering threat and is still taking its toll on businesses and consumers. Economic data on consumer spending and the employment market has been mixed. U.S. consumer confidence declined for the third straight month in September, according to a report from The Conference Board.

Although the economy remains in decent shape, including the job market, "Americans are starting to think twice about some major purchases," Jennifer Lee, senior economist at BMO Capital Markets, said in a report.

Companies are warning that supply-chain problems and higher prices could crimp sales and profits. The Federal Reserve has maintained that rising inflation is temporary and tied to those supply-chain problems as the economy recovers from the pandemic. Investors are still concerned that higher inflation could be more permanent; rising bond yields reflect some of those worries.

"The bottom line is that the supply chain thesis is really being tested and the Fed, businesses and consumers have had to react to some of the on-the-ground realities," said, Eric Freedman, chief investment officer at U.S. Bank Wealth Management.