By William Watts and Joy Wiltermuth
The Dow and S&P 500 eked out gains in the final hour of trade Tuesday, while the tech-heavy Nasdaq Composite finished modestly lower, after congressional testimony from Federal Reserve Chairman Jerome Powell helped reverse a market selloff tied largely to 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.
How did major benchmarks do?
The Dow Jones Industrial Average /zigman2/quotes/210598065/realtime DJIA +0.90% rose 15.66 points, or 0.1%, to close at 31,537.35, recording its biggest daily turnaround since Dec. 21, 2020, according to Dow Jones Market Data.
The S&P 500 /zigman2/quotes/210599714/realtime SPX +1.11% added 4.87 points, or 0.1%, to end at 3,881.37, its sharpest daily reversal since June 15, 2020.
The Nasdaq Composite /zigman2/quotes/210598365/realtime COMP +1.31% fell 67.85 points, or 0.5%, finishing at 13,465.20, but had been down 3.9% at the day’s lows.
On Monday, big losses for tech shares left the Nasdaq more than 2% lower, 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%.
What drove the market?
Stocks erased 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.
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.” But Powell also acknowledged that “developments point to an improved outlook for later this year.”
A sharp rise in Treasury yields, which partially paused Tuesday, 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.
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.