The tech-heavy Nasdaq Composite posted a second straight record on Wednesday as broader stock indices slid in a quiet trading session.
With major indices trading near all-time highs, investors analyze signals about how the economy is going and the Federal Reserve’s intentions as they ponder how much more of a rally might be ahead.
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The S&P 500 fell 4.60 points, or 0.1%, to 4,241.84, 0.3% less than its all-time high last week. The Dow Jones Industrial Average fell 71.34 points, or 0.2%, to 33874.24. The Nasdaq Composite gained 18.46 points, or 0.1%, to 14,271.73, its 16th record close in 2021.
For much of this year stocks have risen from their pandemic lows, fueled by a strengthening economy, supportive monetary policy, and ample government spending. The S&P 500 is up 90% since its closing low in March 2020.
Investors are struggling to see the way forward and have recently been focusing on signs of inflation that could cause the Fed to raise interest rates from near zero in response to the Covid-19 pandemic . Low interest rates add value to future cash flows in popular stock valuation models.
For much of this year stocks have risen from their pandemic lows.
Nicole Pereira / NYSE / Associated Press
The stocks sold off last week after Fed officials signaled that due to the strong economic recovery and spike in inflation, they will hike rates earlier than expected through the end of 2023.
But major indices rebounded this week, with many investors finding that a strong economy should support stocks even if rates eventually rise. Fed chief Jerome Powell reiterated Tuesday that the recent surge in inflation is likely to prove temporary.
“I think the market is still wrestling with where we are on the Fed,” said Cliff Corso, president and chief investment officer, Advisors Asset Management. “The market looks for the economic clues day in and day out and then likely tries to translate those clues into projections for the Fed’s mentality.”
Energy stocks rose on Wednesday as Brent crude, the global oil benchmark, rose 0.5% to $ 75.19 a barrel. The consumer discretionary and financial sectors of the S&P 500 also rose.
As the market rally continues, investors continue to value various sectors and types of companies. In the year to date, value stocks – which tend to be low in relation to their total value – have risen faster than growth stocks.
The Federal Reserve is considering digitizing the dollar, giving people money to access on their phone, and bypassing electronic payments, which can be slow and costly for businesses.
But in the second quarter, it was a different story, the Russell 1000 Growth Index rose 9.9%, compared to a 3.8% rise in the Russell 1000 Value Index.
“Investors could consolidate their profits because there really isn’t much more room for trading to reopen,” said Anu Gaggar, senior global investment analyst for the Commonwealth Financial Network.
Another possible message from the rotation, she said, is that the market is concerned that the Fed may exaggerate interest rate hikes and slow the pace of economic growth, hurting some economically sensitive value stocks.
On a stock-by-stock basis, shares of Fannie Mae and Freddie Mac fell more than 30% on Wednesday after the Supreme Court dismissed most lawsuits from investors contesting a government decision to pass mortgage giants’ profits on to the Treasury Department.
In the bond markets, the yield on 10-year US Treasuries rose from 1.471% on Tuesday to 1.486%. Yields rise when bond prices fall.
The Stoxx Europe 600 lost 0.7% overseas. The Japanese Nikkei 225 closed less than 0.1% while the Hong Kong Hang Seng Index rose 1.8%.
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