Stocks witnessed a widespread decline on Monday in response to the release of new economic data, which tempered investors’ expectations for interest-rate cuts this year. Despite starting the trading day with modest gains, the S&P 500 reversed course after the Institute for Supply Management (ISM) report indicated an expansion in manufacturing activity in March, marking the first such growth since September 2022. The S&P 500 ended the day down 0.2%, while the Dow Jones Industrial Average dropped 0.6%, retreating from record highs reached the previous week. However, the Nasdaq Composite managed to eke out a 0.1% gain, buoyed by strength in large technology stocks.
Investor sentiment had been leaning towards the anticipation of interest-rate cuts by the Federal Reserve to mitigate the risk of an economic slowdown. However, the stronger-than-expected ISM manufacturing index for March, which rose to 50.3 from 47.8 in February, exceeded economists’ forecasts and suggested an expansion in activity. This prompted some investors to reassess their expectations for interest-rate cuts, leading to a slight uptick in yields on U.S. government bonds.
The ISM report, while not government data, is closely monitored by investors and indicated improvement in a previously weak area of the economy. Consequently, the yield on the benchmark 10-year U.S. Treasury note rose to 4.329%, reflecting investors’ revised expectations for short-term interest rates set by the Fed.
Steven Wieting, chief investment strategist and chief economist at Citi Wealth, noted that the ISM report created doubt in the bond market, contributing to the equity market’s downturn. Despite the decline in expectations for interest-rate cuts, investors still anticipate three rate cuts this year, although the likelihood of three or more cuts decreased slightly.
Stocks had largely ignored the rise in Treasury yields and reduced expectations for interest-rate cuts earlier in the year, with the S&P 500 posting a 10% gain in the first quarter, building on the previous year’s 24% increase. Factors contributing to this momentum included excitement over artificial intelligence, solid corporate earnings, and confidence in inflation returning to the Fed’s 2% target.
However, on Monday, the market saw declines across various sectors, with notable losses in stocks like Walgreens Boots Alliance, which dropped 9.9% after reporting a steep quarterly loss. Additionally, shares in Trump Media & Technology Group slid 21% following the release of its full-year earnings results, revealing a significant operating loss and prompting scrutiny over the former president’s potential stock transactions.
The market reaction underscores the sensitivity of investors to economic data and the ongoing uncertainty regarding monetary policy. While expectations for interest-rate cuts have moderated, investors continue to monitor economic indicators closely for insights into the trajectory of the recovery and its implications for financial markets.