Stocks Finish Lower for the Week, Deepening August Slump

During this week, major U.S. stock indexes encountered a decline surpassing 2%, intensifying their August downturn, while yields on Treasury bonds reached levels not seen in years.

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Although U.S. government bond yields receded on Friday from the multiyear highs witnessed on Thursday, they remained elevated enough to foster caution among investors pondering the viability of maintaining the remarkable rally witnessed this year in equities.

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The Nasdaq, enriched with rate-sensitive technology stocks, experienced a 0.2% dip on Friday. Meanwhile, the Dow Jones Industrial Average exhibited a minor increase of around 26 points, equating to less than 0.1%, and the S&P 500 encountered a marginal decline of less than 0.1%. Across all sectors of the S&P 500, the week concluded with a decline.

Eric Kelley, Interim Chief Investment Officer at UMB Financial, a Kansas City-based bank, noted, "The market appeared to have surged ahead of its fundamentals in recent months. A slowdown was to be expected. Nevertheless, even in light of this week's developments, it has been an exceptional year thus far."

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Eric Kelley stated that UMB analysts have determined that 10-year Treasury yields exceeding 4.75% represent a significant menace to stocks.

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The 10-year Treasury yield retreated to 4.251% from Thursday's 4.307%, which marked the highest closing level since 2007. Similarly, the 30-year Treasury yield adjusted to 4.379% from Thursday's 12-year peak of 4.411%. Bonds with maturities ranging from one month to one year are yielding over 5%.

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Doug Peta, Chief U.S. Investment Strategist at BCA Research, emphasized the transformative impact of over a decade of meager yields on government bonds, which had established the belief that there were no viable alternatives for investment beyond equities. The recent year, characterized by the Federal Reserve's interest rate hikes to combat inflation, has prompted a reconsideration of the TINA (There Is No Alternative) philosophy. Doug Peta commented, "Now, numerous alternatives are available."

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Throughout the week, there was a substantial inflow of capital into money-market funds, as investors sought refuge in government bonds as a secure haven. Money-market funds garnered nearly $36 billion in inflows over the past week, marking their most significant influx since May.

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The shift of substantial capital from stocks to bonds is one way investors anticipate the eventual conclusion of the stock rally due to rising interest rates. The other primary concern is the impact of higher borrowing costs on consumer spending power and corporate earnings.

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In the S&P 500, the most pronounced decliners on Friday were companies that reported quarterly earnings and provided financial projections that failed to meet investor expectations. For instance, Keysight Technologies, a manufacturer of electronic test and measurement equipment, saw a decline of 14%, and Deere & Co., known for agricultural machinery, experienced a 5.3% drop.

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Concerns about China's economy weighed on Deere's shareholders, while analysts pointed out that the company's improved financial outlook was predominantly influenced by a favorable tax ruling in Brazil. Similarly, cosmetics giant Estée Lauder, which suffered a 3.3% dip on Friday, attributed its quarterly loss to diminishing sales in China.

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Ross Stores emerged as the top gainer in the S&P 500, with the discount retailer witnessing a 5% increase after reporting better-than-expected earnings and raising its sales and profit outlook for the second half of the year. Cheaper ocean freight costs and lower inflation contributed to the improved margins and enhanced purchasing power for the company's low- to moderate-income customers.

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Commodity prices experienced an upswing on Friday. Benchmark U.S. crude oil escalated by 1.1%, concluding at $81.25 per barrel. Soft-red winter wheat futures observed a gain of 3.9%, while soybean and corn futures exhibited increases of 1.7% and 1.5%, respectively.

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Meanwhile, Bitcoin, which had spent much of the summer hovering around $30,000, dipped to approximately $26,000 on Friday. Notably, Hong Kong's Hang Seng Index encountered a decline exceeding 2%, thereby entering a new bear market, while stock markets in Japan, Germany, France, and the U.K. also experienced declines.

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