Treasury Yields Are Climbing. Can Stocks Hold Their Ground?
Key Takeaways
- Treasury yields remain elevated, keeping pressure on stocks.
- Major indexes are still holding key support, but consolidation suggests investors should stay cautious.
- Higher rates are putting pressure on interest-rate sensitive areas of the stock market.
It was an action-packed week in the stock market. Apple (AAPL) unveiled its foldable phone, tariffs moved back into the headlines, oil prices climbed, diesel prices hit record highs, and U.S. Treasury yields pushed higher.
Investors were also watching August inflation data, especially with an FOMC meeting coming up next week. The numbers came in line with expectations, and the absence of any upside surprise helped to steady the market after a volatile stretch.
Still, it was a rough week overall. The S&P 500 ($SPX) fell 0.80%, the Nasdaq Composite ($COMPQ) dropped 0.66%, and the Dow Jones Industrial Average ($INDU) declined 1.57%.
Rising Rates
Thursday’s price action made investors jittery. Despite Treasury Secretary Scott Bessent’s bond buyback program, U.S. Treasury yields remained elevated. The 30-year Treasury climbed to its highest level since 2003, then pulled back slightly on Friday. The 10-year U.S. Treasury Yield Index ($TNX) reached its highest level since October 2023 (see chart below), and so did the 5-year yields.
Even though the CPI came in line with expectations, inflation remains persistent. That keeps the pressure on the Fed, and the market is expecting a rate hike on Wednesday. According to the CME FedWatch Tool, as of Friday, the probability of a September rate hike was above 85%, with the possibility of another increase later this year.
Inflation is hardly just a U.S. problem. The European Central Bank (ECB) raised interest rates, and it may not done yet. Inflation in Europe climbed to a three-year high in August. The Bank of Japan is also expected to raise rates, and this is worth watching closely. Tighter policy in Japan could impact the U.S. stock market and the broader economy.
Equities Holding Above Support
The rise in yields put tremendous pressure on equities. On Thursday, the S&P 500 fell to the first support level I’m watching. It bounced on Friday, but the rebound wasn’t strong enough to push the index back above its 21-day exponential moving average (EMA).
The S&P 500 ended the week in a consolidation pattern, with no clear directional move. The Dow Industrials showed similar price action, while the Nasdaq Composite continues to hold up relatively well but also remains within a consolidation zone.
Technology was Friday’s best-performing sector, helped by Oracle’s strong earnings after Thursday’s close. Better-than-expected cloud infrastructure revenue gave investors a reason to stay optimistic about the sector. Below is Friday’s Technology sector MarketCarpet.
Small Caps Feelin’ the Pain
One area that tends to feel the pressure quickly when yields rise is small-cap stocks.
This week, the iShares Russell 2000 ETF (IWM) fell below its September 1 low and was trying to hold above its July 31 low. Momentum also weakened, which you can see in the Relative Strength Index (RSI) and the Percentage Price Oscillator (PPO).
Friday’s pullback in yields gave small caps a little breathing room, but the broader trend could be signalling caution. IWM continues to form a series of lower highs and lower lows. If it breaks below 287 with downside follow-through, small caps could see another leg lower.
The US Industries panel on the Market Summary page is also showing some weakness. Homebuilders, Retail, and Transportation have very low StockCharts Technical Rank (SCTR) scores. These industry groups could remain under pressure if interest rates continue to rise.
The Bottom Line
September is so far living up to its reputation as a seasonally challenging month for equities. Interest rates are rising, inflation remains sticky, and all eyes are on the Fed. At this point, the market appears to have priced in a 25-basis-point interest rate hike in September.
Unless there are any surprises, which shouldn’t be ruled out, the bigger question is what comes next. The major indexes are still holding above key support levels but, with elevated yields and rising oil prices, it’s important to stay alert.
Let’s hope next week isn’t as much of a roller coaster ride as this one.
Disclaimer: This blog is for educational purposes only and should not be construed as financial advice. The ideas and strategies should never be used without first assessing your own personal and financial situation, or without consulting a financial professional.
