By Christine Idzelis and William Watts
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 /zigman2/quotes/210598065/realtime DJIA +1.98% 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 /zigman2/quotes/210599714/realtime SPX +1.86% 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 /zigman2/quotes/210598365/realtime COMP +1.59% dropped 315.83 points, or 2.3%, to finish at 13,539.29.
In regular trading Monday, the Dow /zigman2/quotes/210598065/realtime DJIA +1.98% 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 /zigman2/quotes/210599714/realtime SPX +1.86% 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.”