Stocks Close Lower After Two-Day Rally

US stock indexes fell on Wednesday after giving up late-hour gains.

The S&P 500 fell about 0.2%, the technology-focused Nasdaq Composite lost about 0.3%, and the Dow Jones Industrial Average fell about 40 points, or about 0.1%.

Wednesday’s decline continues a week-long sell-off in shares.

On Monday and Tuesday, indexes posted their biggest two-day gains in more than two years.

The market has experienced volatility as the Federal Reserve has hiked interest rates this year to tame elevated inflation.

Economic data released on Wednesday showed signs of a strong economy, bolstering belief that the Fed is unlikely to pivot and fueling the market slump. ADP’s jobs report showed that the US private sector added 208,000 jobs in September and the ISM services index found that growth in the US services sector held better than expected in September. In addition, data showed that the US trade deficit narrowed to $67.4 billion in August, from a revised $70.5 billion a month earlier.

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Of the 11 sectors within the S&P 500, nine sectors were down in afternoon trading, with energy and healthcare remaining positive.

Shares sold off for most of the trading day but quickly rebounded in late afternoon trading before paring gains. Christopher Murphy, co-head of derivatives strategy at Susquehanna International Group, said part of the trend reversal could be due to Goldilocks economic data.

“If inflation can roll over and economic data can stay fairly neutral, that strong, that’s positive,” Mr. Murphy said.

Earlier in the week, investors cheered what they saw as early signs that the Fed’s efforts were working. The World Trade Organization forecast that global trade in goods would slow more than previously expected next year, potentially reducing inflationary pressures but increasing the risk of a global recession. Data released on Tuesday showed US job vacancies fell 10% in August and layoffs rose slightly. Some investors were hoping that a slowdown could reduce inflation and ease pressure on the Fed to hike rates further.

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Over the summer, investor bets that the Fed would slow rate hikes drove stocks and bonds higher. The summer rally came to an abrupt halt in August as Fed Chair Jerome Powell reiterated the Fed’s commitment to containing inflation.

Kevin Flanagan, Head of Fixed Income Strategy at WisdomTree,

said the big question is whether the Fed wants to keep the gas pedal on rates or ease off a bit with the potential November rate hike. “We can laugh at 50 basis points, ‘Woohoo, they’re really slowing down’, but it’s still 50 basis points.”

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The latest rate hike was 75 basis points, or 0.75 percentage point, triggering further losses in stocks and bonds.

Investors were left with few places to hide from the year’s volatility as safe-haven assets have declined with the larger market.

“When it’s raining outside, you get wet,” said Dave Grecsek, managing director of investment strategy and research at Aspiriant. “We’re telling investors to take a raincoat and an umbrella outside.”

Mr. Grecsek said he holds quality stocks in the healthcare and consumer staples sectors. He added that the 10-year government bond is becoming more attractive again due to higher yields.

The Federal Reserve’s primary tool for steering the economy is the change in the Federal Funds Rate, which can affect not only the cost of borrowing for consumers, but also broader business decisions, such as B. the number of employees to be hired. WSJ explains how the Fed manipulates this one rate to control the entire economy. Image: Jacob Reynolds

Shares of Twitter fell 1% on Wednesday. Shares rose 22% on Tuesday after Elon Musk offered to complete his $44 billion deal to buy the social media company on the terms originally agreed.

In energy markets, Brent crude, the international benchmark for oil prices, rose 1.6% to $93.32 a barrel after the Organization of Petroleum Exporting Countries on Wednesday agreed to cut two million barrels a day of oil. Higher oil prices put further pressure on the economy as gasoline is the largest contributor to rising consumer prices.

Energy stocks rallied. Exxon Mobil was up 4.6%, Halliburton was up 4.3% and Phillips 66 was up 2.8%.

In bond markets, the yield on the benchmark 10-year Treasury rose to 3.757% from 3.616% on Tuesday. Yields and prices move in the opposite direction. Higher returns this year have dragged down tech stocks, which typically boast high multiples.

“If there is more pressure, it will come in the stocks with the highest multiples. There is no reason to believe that will change, Fed pivot or not. Stocks with higher multiples have more corrections ahead of them,” said Jeremy Schwartz, global chief investment officer at WisdomTree.

The WSJ Dollar Index, which measures the dollar against a basket of other currencies, gained 0.7%. The British pound fell 1.3% against the dollar, its losses accelerating after a speech by British Prime Minister Liz Truss. Less than a month into her tenure, Ms. Truss is finding her political authority eroding after her recent economic plans sparked a period of market turmoil.

Traders worked on the floor of the New York Stock Exchange on Tuesday.


Photo:

Seth Little/Associated Press

Overseas, the pan-continental Stoxx Europe 600 fell 1%.

In Asia, key indices closed with gains. Hong Kong’s Hang Seng Index rose 5.9%, marking its biggest one-day gain since March as investors caught up with the rally in global stock markets after a local holiday on Tuesday. Markets in mainland China remained closed for a public holiday.

Meanwhile, Japan’s Nikkei 225 rose 0.5% and South Korea’s Kospi rose 0.3%.

Corrections & Enhancements
Dave Grecsek is the Managing Director of Investment Strategy and Research at Aspiriant. In an earlier version of this article, his last name was misspelled as Grecesk. (Corrected on Oct. 5)

Write to Caitlin Ostroff at [email protected]

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