Dow, S&P 500 modestly lower after Fed says policy shift unlikely until economy recovers

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The Dow and S&P 500 turned positive within the final hour of trade Tuesday, while the tech-heavy Nasdaq Composite was holding lower, but off its worst levels of the session, as congressional testimony from Federal Reserve Chairman Jerome Powell helped to reverse a market selloff that had been sparked largely by a sharp rise in bond yields.

The Fed boss during the first of two days of testimony in Washington vowed to keep monetary policy accommodative, and warned that the U.S. economic recovery remains uneven and far from complete.

What are major benchmarks doing?

  • The Dow Jones Industrial Average rose 89 points, or 0.3%, to 31,607, after hitting an intraday low at 31,158.76.
  • The S&P 500 was up 11 points, or 0.3%, to trade at 3,887 but had hit a Tuesday nadir at 3,805.59 before rebounding.
  • The Nasdaq Composite was shedding 53 points, or 0.4%, to 13,480, but had been down by around 4% at the day’s lows.

Big losses for tech shares left the Nasdaq sharply lower Monday, falling more than 2%, while also weighing on the S&P 500. The S&P 500 suffered its fifth straight loss, the index’s longest losing streak since a seven-day skid that ended last Feb. 28. The Dow benefited from a rotation to more cyclically oriented stocks, eking out a gain of 27.37 points, or 0.1%.

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What’s driving the market?

Stocks erased their earlier losses in afternoon trade, after Powell told lawmakers on Tuesday that the central bank doesn’t expect to shift its accommodative policy stance until a lasting economic recovery can be achieved.

Powell, in testimony before a Senate panel, gave no indication that rising bond yields or inflation expectations would rush the Fed to begin reining in its efforts to support the economy.

Recap: Fed Chairman Powell’s testimony to Senate Banking Committee

Instead, the Fed chairman again emphasized that he doesn’t expect a “large or persistent” rise in inflation, even as trillions worth of stimulus slosh through the economy and swaths of the population line up to get vaccinated.

“We will be watching that very carefully,” Powell said of inflationary pressures. But he noted that the “economy is a long way from our employment and inflation goals, and it is likely to take some time for substantial further progress to be achieved.” He described the recovery as “uneven” and “far from complete,” while saying the path ahead remained “highly uncertain.” Powell, however, acknowledged that “developments point to an improved outlook for later this year.”

A sharp rise in Treasury yields has captured the attention of investors, spelling trouble for tech and other previous highfliers. Rising yields make bonds a more viable alternative to stocks, particularly those that have seen their valuations stretched.

“That’s certainly a concern in the market,” Yung-Yu Ma, chief investment strategist for BMO Wealth Management, told MarketWatch in an interview, adding that while Powell made clear he doesn’t expect inflation to “change on a dime,” that inflation in today’s environment could play out differently from the past.

“It’s somewhat new territory we are wading into, given the size of the stimulus,” Ma said. “That’s what the markets are contending with.”

Shares of companies more dependent on the economic cycle have benefited, buoyed by expectations for a pickup in growth as the economy more fully reopens courtesy of aggressive fiscal stimulus, vaccine rollouts and falling COVID-19 cases.

Read: Climbing bond yields globally put central banks ‘in a bind,’ warns economist

Meanwhile, rising yields progressively have made bonds viable alternatives to stocks, especially equities that led the market higher after the onset of the COVID crisis, said Scott Knapp chief market strategist at CUNA Mutual Group.

“While very early in a process that has no guarantee it will continue, market sentiment is moving from ‘there is no alternative to stocks’ to ‘stocks look like the less-attractive alternative,’” he said. “Only time will tell if markets stay on this path.”

At the same time, with the benchmark 10-year Treasury yield currently near 1.4%, government debt still could be a tough play for yield chasers in a 2% environment for inflation.

In One Chart: Can the bull market in stocks survive rising inflation, bond yields? Here’s what history says

On the fiscal front, the House Budget Committee on Monday approved a $1.92 trillion bill to carry out President Joe Biden’s coronavirus relief plan, a first step toward likely House passage by the end of the week. While the ultimate package is likely to shrink, analysts expect its final price tag to come close to Biden’s $1.9 trillion proposal.

Read: Should I buy bitcoin? Why the cryptocurrency is on the verge of a bear market

The S&P CoreLogic Case-Shiller home price index showed house prices rose 10% in December.

The Conference Board said its index of consumer confidence rose to a three-month high of 91.3 in February from a revised 88.9 in January.

Which companies are in focus?

What are other markets doing?

  • The yield on the 10-year Treasury note was roughly flat at 1.36%. Yields and bond prices move in opposite directions.
  • The ICE U.S. Dollar Index a measure of the currency against a basket of six major rivals, was up 0.1%.
  • Oil futures were flat, with the U.S. benchmark trading near $61.93 a barrel. April gold futures closed 0.1%lower to settle at $1,805.90 an ounce.
  • In overseas stock trading, the pan European Stoxx 600 dropped 0.4% and London’s FTSE 100 closed up 0.3%. The Shanghai Composite fell 0.2%, while Hong Kong’s Hang Seng Index rose 1%.
  • Bitcoin BTCUSD continued to drop sharply from its high above $50,000 after Treasury Secretary Janet Yellen on Monday called the cryptocurrency an “extremely inefficient” way to conduct transactions.
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