Federal Reserve begins 2-day policy meeting expected to lay groundwork for March rate hike
All three major benchmarks closed lower Tuesday, with the Dow Jones Industrial Average failing to hold earlier gains, as Wall Street wound down another volatile day of trade.
U.S. stocks came back under pressure as the Federal Reserve kicked off a two-day policy meeting and investors sifted through a mixed bag of corporate earnings.
What did stock indexes do?
- The Dow Jones Industrial Average DJIA fell 66.77 points, or 0.2%, to close at 34,297.73, after falling more than 800 points at its session low in early Tuesday action and climbing into positive territory in the afternoon.
- The S&P 500 SPX declined 53.68 points, or 1.2%, to end at 4,356.45 after briefly trading in correction territory. A close below 4,316.90 would marked a 10% fall from the benchmark’s Jan. 3 record finish, meeting the definition of a market correction.
- The Nasdaq Composite COMP dropped 315.83 points, or 2.3%, to finish at 13,539.29.
In regular trading Monday, the Dow DJIA gained 99.13 points, or 0.3%, to finish at 34,364.50, after being down by as much as 3.3% earlier in the day. The S&P 500 SPX notched a 0.3%, gain after sinking as much as 4% and briefly falling into correction territory. The Nasdaq advanced 0.6%, at 13,855.13, erasing a 5% intraday slump.
What drove markets?
U.S. stocks dropped in volatile trade as investors sought to cope with rising inflation, anxiety over the Federal Reserve’s expected policy changes, fears of a Russian invasion of Ukraine and the ongoing COVID-19 pandemic.
“Investors are just continuing to digest this idea that Federal Reserve policy is likely to be tighter than what was expected at the end of last year” as it responds to “inflation pressures,” said Anthony Saglimbene, global market strategist at Ameriprise Financial, in a phone interview Tuesday. “Riskier areas of the market have kind of reset to the idea that we’re just not going to have the type of liquidity that we’ve had in the market over the last 18 months.”
The Nasdaq Composite last week entered correction territory as it fell more than 10% from its all-time high in November. The index, which is heavy on interest rate-sensitive growth stocks, was battered as Treasury yields rose sharply to begin the year as investors ramped up expectations for Federal Reserve rate increases.
The decline in stock prices is a “healthy development in the market,” as it takes away some of the “froth” that has accumulated over the last several months, said Saglimbene. He suggested that investors may want to draw up their “shopping lists” for high-quality companies in technology and “cyclical companies that are still benefiting from the reopening trade.”
Financials are “a good place to be as they actually benefit from rising rates,” Saglimbene said, while also suggesting that investors look across the S&P 500 index for high-quality stocks that have sold off “significantly.”
The Fed Funds futures are pricing in a high probability of a rate hike by the central bank in March to combat high inflation, according to Saglimbene.
“Markets are now in no doubt that policy makers need to act quickly to get a grip on inflation,” said Raffi Boyadjian, lead investment analyst at XM, in a note. “But there are worries that the Fed has fallen so behind the curve, it won’t be possible to bring inflation back under control without choking off growth.”
The central bank began a two-day policy meeting Tuesday, with investors expecting to see officials lay the groundwork for a rate increase in March. The meeting will be closely watched for clues to the pace of further hikes, as well as how soon and quickly the Fed will begin winding down its balance sheet.
“We don’t believe we’re knocking on the door of a recession,” said Emily Roland, co-chief investment strategist at John Hancock Investment Management, in a phone interview Tuesday. But “we do see a potential air pocket in economic growth in the first quarter” as a result of the omicron variant of the coronavirus, she said.
A survey of consumer confidence fell 1.4 points in January to 113.8, indicating that omicron and high inflation weighed on the minds of Americans early in the new year. Economists polled by The Wall Street Journal had forecast the index to shrink to 111.7 from a revised 115.2 in December.
“Recent price action suggests the long overdue equity market correction has finally begun. In our view, this is a healthy long-term development,” said Steven Ricchiuto, U.S. chief economist at Mizuho Securities, in a Tuesday note.
“We are not calling a bottom to the market but, with the broad market index down a bit over 10%, it is time to begin nibbling at some of the more beaten down areas of the market,” he wrote. “This window of opportunity could stretch until the March 25 rate hike, but that does not mean value has not already been created in the most distressed areas of the market.”
Which companies were in focus?
- Nvidia Corp. NVDA shares fell 4.5% after a news report indicated that the company is preparing to give up on its planned purchase of Arm Ltd. from SoftBank Group Corp.
- Shares of 3M Co. MMM rose 0.6% after delivering stronger-than-expected earnings.
- Johnson & Johnson JNJ shares rose 2.9%, after the consumer goods, pharmaceutical and medical device maker posted weaker-than-expected revenue for the fourth quarter.
- Shares of General Electric Co. GE dropped about 6%, after the industrial conglomerate reported fourth-quarter free cash flow that topped expectations but saw revenue fall short of forecasts.
- International Business Machines Corp. IBM late Monday topped earnings and revenue forecasts, but executives declined to provide an earnings outlook. IBM shares climbed 5.6%.
- American Express Co. AXP shares jumped 8.9% after the company topped revenue and earnings expectations for the fourth quarter, citing record levels of spending through its cards.
- Shares of Raytheon Technologies Corp. RTX rose 2.5% after the aerospace and defense company reported fourth-quarter profit that beat expectations but revenue that missed, and provided a downbeat full-year outlook.
- Lockheed Martin Corp. LMT shares climbed 3.7% after the aerospace and defense company reported fourth-quarter profit and sales that rose above expectations, with growth in aeronautics, missiles and fire control and rotary and mission systems sales offset a decline in space sales.
How did other assets fare?
- The yield on the 10-year Treasury note BX:TMUBMUSD10Y rose 4.9 basis points to 1.784%. Yields and debt prices move opposite each other.
- The ICE U.S. Dollar Index DXY, a measure of the currency against a basket of six major rivals, was up around 0.1%.
- Oil futures CL rose, with West Texas Intermediate crude for March delivery rising nearly 2.8% to settle at $85.60 a barrel. Gold futures GC00 rose 0.6%, settling at $1,852.50 an ounce, the highest in two months.
- The Stoxx Europe 600 XX:SXXP rose 0.7%, while London’s FTSE 100 UK:UKX gained 1%.
- The Shanghai Composite CN:SHCOMP fell 2.6%, while the Hang Seng Index HK:HSI shed 1.7% in Hong Kong and Japan’s Nikkei 225 JP:NIK declined 1.7%.