The Dow Jones industrial average slipped more than 2 percent — 550 points — at its low in trading Tuesday as a key U.S. government bond yield hit 3 percent for the first time in more than four years and in reaction to a seemingly innocuous comment from a Caterpillar executive.
Traders have been worried that the rising yield of long-term government bonds may mean higher rates for consumers and companies and a period of falling stock prices.
The Dow clawed back some ground in the final minutes of trading and closed the day down 1.7 percent, or 424 points.
The Standard & Poor’s 500-stock index and the tech-heavy Nasdaq Composite also showed sharp losses — dropping 1.3 percent and 1.7 percent respectively.
Oil prices, which had recently hit highs not seen since late 2014, pulled back slightly.
It was a broad sell-off across sectors, with 3M, Caterpillar, DowDuPont and Travelers leading the losers in the Dow. But companies as diverse as Apple, Coca-Cola and Goldman Sachs all tumbled.
3M, the maker of Scotch tape and Post-it notes, weighed most heavily after the company said it would lower its earnings guidance for 2018. Shares of the bellwether multinational dropped more than 8 percent, and other industrial corporations followed suit.
Scott Clemons, chief investment strategist at Brown Brothers Harriman, said the sell-off among the industrials was the result of a brief aside in the earnings call of Caterpillar chief financial officer Brad Halverson, who said the first quarter profit “will be the high-water mark for the year” because of increased investment later in 2018.
“The comment that the first quarter represented a high-water mark for the company spooked industrials as well as the overall market,” Clemons said. “Today is just a ripple effect.”
Stock prices are at historic highs and investors are sensitive to any signal that corporate earnings might slide.
The S&P 500 index and the Nasdaq Composite were also in negative territory Tuesday afternoon, with each index falling about 2 percent as well.
The 10-year Treasury is a proxy for interest rates and a predictor of the long-term outlook for the U.S. economy. The yield on the 10-year is one of the most closely followed financial measures in the world; mortgages and corporate loans are closely tied to the government bond.
Investors tend to move toward bonds as a safer bet than stocks when the 10-year yield strikes 3 percent or more.
Christine Benz, director of personal finance at Morningstar, said the rising yield makes bonds more tempting.
“With bond yields popping up into the 3 percent neighborhood, they’re a more compelling option today than was the case when yields were little more than half that,” Benz said.
The Dow’s industrials were hit the hardest, led downward by 3M and Caterpillar, which dropped more than 6.5 percent. Travelers Companies, which reported a disappointing first quarter, was down 4 percent.
The only S&P 500 sectors in positive territory were utilities, telecommunications and real estate. Industrials, information technology and consumer staples were the laggards.
There are tens of billions of dollars in 10-year Treasurys across the planet at any given day, with banks, mutual funds and foreigners among the largest holders. The bonds are traded on the secondary market. The yields react to supply and demand, with yields rising when prices decline and yields dropping when the 10-year gets more expensive.
Wall Street believes the up-or-down movement of its yield is a crystal ball that foretells inflation, recession, bull markets, bear markets, home prices and corporate profits.
“Investors are worried about interest rates going up and the risks of overheating the economy,” said Torsten Slok, chief international economist with Deutsche Bank. “People are selling stocks and chewing on what to do next.”
The yield level itself doesn’t signal recession. What matters is the difference between the two-year yield and the 10-year yield. Right now, the difference between them is about half of a percentage point. The risk of recession rises as the difference gets closer to zero.
Clemons said he is not worried about a recession because of strong underlying data from the housing and labor markets are supportive of a healthy economy. He seemed to think the markets were overreacting to the 3 percent threshold on the 10-year yield.
“I don’t understand the concern about the 3 percent yield,” Clemons said. “The 10-year yield was at 3 percent in 2014, and that’s not ancient history. The S&P is up 55 percent since the beginning of 2014.”
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