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Dow, S&P 500 book modest comeback, but Nasdaq extends skid to 4th day as Treasury yields climb

MarketWatch logo MarketWatch 9/29/2021 Joy Wiltermuth
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MARKET SNAPSHOT

U.S. stock benchmarks recovered some ground Wednesday, following the worst selloff for the S&P 500 index in roughly four months, after climbing bond yields spooked investors already bracing for the Federal Reserve’s planned wind down of easy-money policies as the economy recovers.

How did stock indexes perform?
  • The Dow Jones Industrial Average rose 0.3% to end at 34,390.72, a gain of 90.73 points, but off the session’s high.
  • The S&P 500 gained 0.2% to close at 4,359.46, picking up 6.83 points.
  • The Nasdaq Composite Index shed 34.24 points, or 0.2%, finishing at 14,512.44.

On Tuesday, the Dow fell 569 points, or 1.63%, to 34,300 and the S&P 500 declined 90 points, or 2.04%, to 4353, its worst daily percentage drop since May 12, according to Dow Jones Market Data. The Nasdaq Composite dropped 423 points, or 2.83%, to 14547.

Read: Only 47 stocks in the S&P 500 have fallen over the past year—Wall Street predicts they will climb up to 54% in 12 months

What drove the market?

Wednesday’s modest move higher for two major stock indexes came even though benchmark U.S. Treasury yields edged higher for a seventh straight day, putting the yield on the 10-year Treasury near 1.54%.

Yields began their ascent last week, following a Federal Reserve meeting that indicated the central bank was ready to begin backing away from its accommodative policy put in place to help the economy cope with the pandemic.

Surging yields pushed some investors to press the sell button this week, notably on interest rate sensitive technology and other growth-related names, though companies geared to the economic cycle also saw losses.

Federal Reserve Chairman Jerome Powell said Wednesday that high U.S. inflation and shortages could last into the early part of 2022, but that he expects price pressures to cool off as supply-chain bottlenecks ease. On Tuesday, Powell said some of the supply-side glitches behind the surge in inflation have “gotten worse.”

Fed Chair Powell has begun to characterize inflation as “stronger than expected and probably less transitory than originally thought,” said Joe Quinlan, head of CIO market strategy for Merrill and Bank of America Private Bank, in a phone interview Wednesday.

“The question isn’t when will the Fed start tapering. That’s already priced in. But do we pull more rate hikes forward in 2022?” Quinlan said. “That’s what markets are trying to figure out.”

Instead of worrying about the Fed potentially increasing interest rates too quickly and stunting the economic recovery, as some others fear, Quinlan said the bigger risk may be going too slow, particularly if inflation stays elevated.

“The biggest issue is that we haven’t seen the light at the end of the tunnel on these supply-chain bottlenecks,” Quinlan said, adding that when quarterly corporate earnings reporting kicks off in about two weeks that, “earnings guidance will be all about bottlenecks, bottlenecks.”

Other investors and analysts think increasing pricing pressures could be fairly muted.

“We expect underlying inflation in the US to be significantly higher over the next decade on average than it has been over the last one,” wrote John Higgins, chief markets economist at Capital Economics in a Wednesday research note. “Nonetheless, we don’t think that it will climb sharply from here, or that it will coincide with much weaker economic growth or tighter monetary policy,” the economists wrote.

“So, in our view, markets will not falter in the way that they did during some periods of high inflation in the past,” he said.

While investors looked ready to buy some beaten-down equities on Wednesday, they remain wary as Democrats and Republicans are deadlocked over a funding package needed to prevent a government shutdown.

Without any action to raise the U.S. debt limit, the Congressional Budget Office estimated the U.S. likely will run out of money near the end of October or early November, slightly further off than U.S. Treasury Secretary Janet Yellen’s Oct. 18 estimate.

Read: What happens if the U.S. defaults on its debt?

Senate Democrats are teeing up a stopgap funding bill to avert a government shutdown, but without a provision to increase the federal debt limit. The bill would extend funding through Dec. 3.

Democrats in the House remain divided over the progress of the bipartisan infrastructure bill passed earlier by the Senate and the larger tax and social spending package that encompasses much of Joe Biden’s economic agenda.

On the data front, U.S. pending home sales rose 8.1% in August, compared with July, the National Association of Realtors reported Wednesday, far exceeding expectations. Economists polled by MarketWatch had projected a 0.4% increase for pending home sales in August.

Which companies were in focus?
  • Dollar Tree Inc. shares soared 16.5% Wednesday after the discount retailer announced it would be testing higher-priced merchandise in its Dollar Tree and Dollar Tree Plus stores.
  • Tesla Inc. shares advanced 0.5% Wednesday after Wall Street analysts this week said they expect the company to report third-quarter deliveries in next few days that still likely feel the pinch from the ongoing chip shortage.
  • Shares of Micron Technology Inc. fell 2% after a disappointing earnings forecast from the chip maker late Tuesday.
  • Shares of Lucid Group Inc. rose 7.1% after the electric-vehicle maker on Tuesday showed off its first cars said it would deliver them to customers starting late next month.
  • Warby Parker Inc. shares jumped 36.2% in its direct listing trading debut Wednesday, after it received a reference price of $40 a share by the New York Stock Exchange, valuing the eyewear maker at nearly $5 billion.
How did other assets trade?
  • The 10-year Treasury note was yielding 1.540%, versus 1.534% at 3 p.m. Eastern Time on Tuesday.
  • The ICE U.S. Dollar Index DXY, a measure of the currency against a basket of six major rivals, was up 0.7%.
  • Oil futures pulled back from an earlier jump, with the U.S. benchmark CL00 giving up 0.6% to settle at $74.83 a barrel. Gold futures GC00 settled near a 6-month low, falling 0.8% to end at $1,722.90 an ounce.
  • In European equites, the Stoxx Europe 600 index closed up 0.6%, following the biggest percentage decline since July 19. Asian equities were mostly lower across the board, with the Nikkei 225 index ending down 2.1% and China’s CSI 300 index closed 1% lower and the Shanghai Composite Index ended 1.8% lower.

Barbara Kollmeyer contributed reporting

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