NEW YORK (AP) — Wall Street faltered in its first trading session on Tuesday after falling in a bear market on fears that high inflation could cause central banks to tighten the brakes on the economy too hard.
LOOK: Markets plunge on fear of a sharp rise in interest rates
The S&P 500 was down 0.2% in afternoon trade as investors brace for the Federal Reserve’s announcement on Wednesday on what it will do with interest rates. It was a choppy move, however, and the index swung between an earlier loss of 0.5% and a gain of 0.8% after a few large companies bolstered their financial strength with higher earnings and payouts. to shareholders.
The Dow Jones Industrial Average was down 168 points, or 0.6%, at 30,350 as of 12:20 p.m. EST, and the Nasdaq composite was up 0.3% after hovering between a gain of 0.9% and a loss of 0.4%.
Market trading was calmer, though still hesitant, after Monday’s global rout. Stocks in Asia and Europe were mixed, while investor jitters on Wall Street eased.
Cryptocurrencies were mixed. They have been among the hardest hit by the market rout this year as the Federal Reserve and other central banks raise interest rates in an effort to contain inflation and forcefully turn off the “easy mode” that has helped support the markets for years. Bitcoin narrowed its loss to 5% and stood at $22,614, according to CoinDesk. It fell overnight to nearly 70% below its all-time high of $68,990.90 set late last year.
Offering some support to the market, a report showed that wholesale inflation was somewhat weaker than expected in May, although it remains very high. That could be an indication that wholesale inflation peaked in March, according to Jack Ablin, chief investment officer at Cresset Capital Management.
Economists said the data won’t stop the Federal Reserve from raising its key interest rate this week by a larger than normal amount, with some even speculating on the biggest increase since 1994, triple the usual move . But the numbers didn’t bludgeon the market like last week’s consumer-level inflation data, which showed inflation was getting worse, not improving as some investors had hoped.
Treasury yields rose and fell and remained near their highest levels in more than a decade hit on Monday. They also have a relatively reliable bond market recession warning signal flashing intermittently.
In afternoon trading, the two-year Treasury yield had fallen back below the 10-year yield, to 3.43% from 3.45%. This is generally how things look in the bond market.
In the unusual circumstances where the two-year yield exceeds the 10-year yield, some investors see this as a sign that a recession could hit in about a year or two. It’s called an “inverted yield curve,” and it’s flashed intermittently over the past day.
On Wall Street, Oracle climbed 9% after reporting higher revenue and profit for its latest quarter than analysts expected. FedEx jumped 12.3% after increasing its dividend payout by more than 50%.
It was the first trade in U.S. stocks after the S&P 500 closed on Monday 21.8% below its record high set earlier this year. This put it in a bear market, what investors call a drop of 20% or more.
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At the center of the sell-off is the US Federal Reserve’s effort to control inflation by raising interest rates. The Fed tries to control prices and its main method is to raise rates, but it is a brutal tool that could slow the economy too much and cause a recession.
“The real calm in the current market is very largely due to the focus on this week’s Fed decision.” said Greg Bassuk, CEO of AXS Investments. “Today is either the calm before the storm or the calm that hopefully will represent a long period of calm.”
Other central banks around the world, including the Bank of England, have also hiked rates, while the European Central Bank has announced it will do so next month and in September.
The war in Ukraine is driving up oil and food prices, fueling inflation and undermining consumer spending, especially in Europe. COVID infections in China, meanwhile, have led to severe restrictions and slowing business that threatens to restrict the world’s second-largest economy and worsen struggling supply chains.
“The old pre-corona balance of low inflation, ultra-loose monetary policy and low geopolitical risk premia no longer holds,” said Andreas Koester, head of portfolio management at Union Investment in Frankfurt, Germany.
“We are now in a transition to a new post-corona equilibrium, of which only the contours are visible, such as higher levels of inflation or a return to great power competition on the international stage,” Koester added.
The reorientation of central banks, particularly the Fed, towards higher interest rates has reversed the dramatic rise in equity prices spurred by massive market support after the pandemic hit in early 2020. Markets brace higher than usual, in addition to some discouraging signals about the economy and corporate earnings, including a record early reading on consumer sentiment embittered by high gas prices.
Higher interest rates generally make investors less willing to pay high prices for risky investments. That’s why some of the biggest stars of the previous low-rate era were among the hardest hit by this year’s rout, including bitcoin and high-growth tech stocks like Netflix, which fell more than 70%. % in 2022.
AP Business Writers Damian J. Troise and Yuri Kageyama contributed.