By Christine Idzelis and William Watts
U.S. stocks finished higher Tuesday, building on Monday’s sharp rebound from last week’s losses, as Federal Reserve Chair Jerome Powell reiterated his view that higher inflation will be transitory as the economy slowly works its way out of the pandemic this year.
What are major benchmarks doing?
The Dow Jones Industrial Average /zigman2/quotes/210598065/realtime DJIA -0.42% rose 68.61 points, or 0.2%, to 33,945.58.
The S&P 500 /zigman2/quotes/210599714/realtime SPX -0.54% advanced 21.65 points, or 0.5%, to 4,246.44.
The Nasdaq Composite /zigman2/quotes/210598365/realtime COMP -0.71% gained 111.79 points, or 0.8%, to 14,253.27, a new record close.
On Monday, stocks bounced back sharply from the previous week’s heavy losses, with the Dow advancing 586.89 points, or 1.8%, while the S&P 500 rose 1.4% and the Nasdaq Composite gained 1.8%.
What drove the market?
The S&P 500 index ended Tuesday near a new closing record, while the Nasdaq Composite reached a new all-time high, led by technology stocks. Netflix /zigman2/quotes/202353025/composite NFLX +0.65% , Amazon /zigman2/quotes/210331248/composite AMZN -7.56% , Apple /zigman2/quotes/202934861/composite AAPL +0.15% and Microsoft /zigman2/quotes/207732364/composite MSFT -0.55% and Facebook /zigman2/quotes/205064656/composite FB -0.56% all gained, and even Alphabet /zigman2/quotes/202490156/composite GOOGL -0.77% /zigman2/quotes/205453964/composite GOOG -0.97% rose even though the European Commission opened a probe into Google’s advertising business.
U.S. stocks advanced as Chair Powell testified before the House select subcommittee on the coronavirus pandemic, marking his first public appearance since last Wednesday when he acknowledged that policy makers had started to discuss the eventual reduction of the Fed’s monthly bond purchases.
In responding to questions from Congress, Chair Powell on Tuesday again signaled the central bank would be patient before scaling back its lose monetary policy, saying the Fed had to be “very humble” about its ability to draw a signal out of the economic data given “such an unusual setting of reopening the economy.”
“U.S. stocks pushed higher after Fed Chair Powell’s testimony calmed financial market worries over runaway inflation triggering a quicker removal of stimulus,” said Edward Moya, Senior Market Analyst, The Americas, at OANDA.
In prepared testimony released by the subcommittee late Monday, Powell said, “the Fed will do everything we can to support the economy for as long as it takes to complete the recovery.” Inflation, meanwhile, remains top of mind for investors.
“Powell reiterated his view that the recent jump in inflation would prove transitory. While such comments seem to have soothed concerns over the Fed’s hawkish tilt, the question is for how long?” said Lukman Otunuga, senior research analyst at FXTM, in a note. “Given how markets remain highly sensitive to comments from Fed officials and inflation expectations, the next few days promise to be quite eventful for markets with numerous Fed speakers on the roster.”
A key question for investors following the market reaction to last week’s Fed moves centers on the fate of the reflation trade — bets that assets poised to benefit the most from accelerating economic growth and inflation will outperform their peers.
J.J. Kinahan, TD Ameritrade’s chief market strategist, said in an interview Tuesday that he is expecting a “tug a war” between growth and value stocks to continue as investors keep trying to discern whether inflation may be longer lasting.
The reflation trade found renewed life Monday, after suffering in the wake of last Wednesday’s Fed meeting, with value-oriented stocks falling, growth stocks rallying and the yield curve flattening. But the Fed’s change in tone is unlikely to stand in the way of continued post-pandemic growth and a further rise in inflation, said Lauren Goodwin, economist and portfolio strategist at New York Life Investments.
“The reflation trade will not develop linearly from here, and investors should expect hiccups. But the Fed’s adjusted path is hardly a recession-starter,” she said, in a note.
“Higher short-term rates in 2023 and fewer asset purchases in 2022 are unlikely to dramatically shift the ongoing rebound in economic growth,” Goodwin wrote. “Instead, this brief unwind will represent an opportunity to build positions in the reflation theme, through cyclical equity and lower duration.”