Why Did the Stock Market Drop Today? Blame the Fed.

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Stocks tanked Tuesday after a Federal Reserve Governor, who is also the Fed vice-chair nominee, said the central bank would reduce its balance sheet next month.

The

Dow Jones Industrial Average
closed down 281 points, or 0.8%, while the

S&P 500
dropped 1.3%, and the

Nasdaq Composite
tumbled 2.3%.

Index gains “came to a screeching halt,” wrote New York Stock Exchange analysts, when Fed Governor Lael Brainard raised the central bank’s balance sheet in a speech Tuesday at the Minneapolis Fed.

Brainard, who is also President Joe Biden’s pick to be the Fed’s second in command, said the Fed would begin rapidly reducing its balance sheet in May. That would drag bond prices lower and lift their yields. Higher borrowing costs are meant to curb inflation by reducing economic demand.

The 10-year Treasury yield surged to 2.56% from 2.46% earlier in the day, and that’s hitting technology stocks hard. Higher long-dated government bond yields make future profits less valuable—and many fast-growing tech companies are valued on the basis that they’ll churn out a chunk of their profits many years in the future.

This may not just be a knee-jerk reaction, as Brainard’s comments indicated the Fed is taking real action. Wall Street is taking this seriously. “We’ll be watching further comments from Brainard on inflation,” wrote Ian Lyngen, head of U.S. rates strategy at BMO Capital Markets. 

The Fed is just one concern.

The European Commission is expected to propose fresh sanctions on Russia, which include a ban on Russian coal and could result in cutting off access of Russian road and shipping goods carriers to the European Union. Elsewhere, French Finance Minister Bruno Le Maire said Tuesday that all 27 member nations of the EU are determined to impose coal and oil sanctions on Russia. While they would serve as a punishment for Russia, they would also contribute to the already-high inflation that threatens to reduce consumer spending. 

Overall, the “Ukraine conflict adds more uncertainty, especially via commodity prices,” wrote Robert Buckland, equity strategist at Citigroup. 

That should send the price of oil higher — and WTI Crude oil initially gained in the morning. But as the selling in risky assets like stocks intensified, oil dropped with WTI ultimately dipping 3.1% to about $100 a barrel.

Either way, the market is concerned that the price of oil could easily rip higher from here. “The threat of European sanctions on Russian oil remains an upside risk for crude prices,” wrote Craig Erlam, senior market analyst at Oanda. 

But even before the Russia and Fed news, the S&P 500 was having trouble moving above a key level. The S&P 500 has hit a ceiling recently. The index, at just over 4,500, has been unable to sustainably move higher than 4,600 in the past few months. 

“From our standpoint, the S&P 500 now appears stuck in a bit of a holding pattern (between 4,500 and 4,600) after the short-covering rally has run its course,” wrote Rosenberg Research’s David Rosenberg.

Looking ahead, the minutes from the Federal Reserve’s last meeting will be released Wednesday. With the market already digesting news that the Fed will soon reduce its bond holdings, it wouldn’t be much of a surprise if stocks stage a rally this week. “There could be a reversal after the minutes tomorrow,” wrote NatAlliance Securities’ Andrew Brenner. 

We’ll have to see if the S&P 500 can break above 4,600 in that case.

Here are five stocks on the move Tuesday:

Twitter (ticker: TWTR) rose 2%, building on a 27% jump on Monday following news that

Tesla (TSLA) CEO Elon Musk will serve on Twitter’s board of directors, after disclosing he had become the social media platform’s largest shareholder with a 9.2% stake.

Carnival (CCL) surged 2.4% after the tour group said that the one-week period of March 28 to April 3 was the busiest week for bookings in the company’s history.

Generac Holdings (GNRC) stock gained 0.2% after getting upgraded to Buy from Neutral at Goldman Sachs. 

Domino’s Pizza (DPZ) stock fell 3.1% after getting downgraded to Market Perform from Outperform at Cowen. 

VF Corp. (VFC) stock slipped 2.1% after getting downgraded to Equal Weight from Overweight at Wells Fargo. 

Write to Jack Denton at [email protected] and Jacob Sonenshine at [email protected]