Rising Interest Rates Put Brakes on Markets

Today the major markets have given back all of yesterday's big gains -- and then some. As of 12:55 a.m. EDT the Dow Jones Industrial Average (DJINDICES: ^DJI  ) is down 160 points, or 1.04%. The S&P 500 (SNPINDEX: ^GSPC  ) has lost 1.05% of its value, while the NASDAQ is lower by 0.9%. The only real economic data released today came from the housing market with the mortgage purchase application survey. The data indicated that there was an 8.8% decrease in application activity. The bulk of the decline came from a 12% drop in refinancing, and because that accounted for 71% of all applications, it wiped out the 3% rise in purchase applications we saw over the previous week. 

This data is not encouraging, but the fact that more Americans are buying homes each week is. Today's stock market declines are likely the result of rising interest rates and the knowledge that bond rates will continue to increase in the coming months.

The Dow's biggest losers are all mainstream consumer staples whose stock prices rose as bond interest rates fell in response to the Federal Reserve's policies and investors chased yield in safe, stable stocks. But now that the Fed is hinting at slowing its bond-buying programs and actual rates are beginning to rise, those investors who sought safe returns are now selling stocks in preparation for days of higher bond rates. Shares of Johnson & Johnson, Coca-Cola, Procter & Gamble, and even the high-dividend-paying Pfizer are all down 2% or more today on little negative news.

All four of these stocks currently have dividend yields around 3%, and with interest rates on 30-year Treasuries now above 3%, and even 10-year notes paying 2.15%, investors looking for reliable returns are likely moving out of stocks and into the bond market.

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