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Dow rebounds from steep losses as inflation fears ease

Dow Jones

The blue-chip wiped out a 360-point loss and finished 0.1%, at 31,537.35

The Dow Jones Industrial Average rebounded from steep losses and ended the session in the green on Tuesday after Fed Chair Jerome Powell relieved some of the concerns about higher interest rates and inflation.

The blue-chip Dow wiped out a 360-point loss and finished 15.66 points higher, or 0.1%, at 31,537.35. The S&P 500 also trimmed a 1.8% loss and closed 0.1% higher at 3,881.37.The Nasdaq Composite dropped 0.5% to 13,465.20. At its session low, the tech-heavy benchmark dropped below its 50-day moving average for the first time since Nov. 3 on an intraday basis.

The intraday turnaround came after Powell said in his testimony to Congress that inflation is still “soft” and the economic outlook is still “highly uncertain,” easing fears of a policy change by the central bank.

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, the Fed chief said in prepared remarks for the Senate Banking Committee.

Inflation fears have risen in recent weeks amid a sharp rise in bond yields as policymakers debate another round of fiscal stimulus. Investors worry that a spike in prices due to federal stimulus could force the central bank to raise short-term borrowing costs.

The Fed is focused on employment and seems very willing to absorb higher inflation and excesses in financial market that brings financial instability in hopes of getting there, Peter Boockvar, chief investment officer at Bleakley Advisory Group, said in a note. But, as seen in the long end of the yield curve, the markets have a say here too and they are speaking loudly. Hopefully at some point Fed officials will listen.

Tech stocks, which came under pressure amid higher interest rates, pared losses after Powell’s comments. Tesla ended 2.2% lower after falling as much as 13%. The electric car maker suffered a 9% slide in the previous session. Apple’s stock fell just 0.1% after dropping 6%.

Energy and financials once again supported the market Tuesday as investors snap up shares in companies that are expected to benefit from an economic recovery. The energy sector added 1.6%, bringing its 2021 rally to nearly 27%.

Jonathan Golub, Credit Suisse’s chief U.S. equity strategist, believes cyclical stocks will lead the market to new highs in the rest of the year on the back of earnings upside and optimism on the economic reopening.

Rising rates — a benefit to Financials — and copper and oil prices — a boon for Industrials, Energy, and Materials — further augment this favourable backdrop, Golub said in a note Tuesday.

Credit Suisse raised its S&P 500 year-end target to 4,300 from 4,200 previously. The new forecast represents a further 11.5% rally.

Small caps were the relater underperformer with the Russell 2000 falling 0.9% Tuesday, paring its February gains to 7.6%. These value shares have been outperforming the S&P 500 in 2021 on optimism over vaccine rollout and the economic reopening.

The sell-off in tech darlings and much-loved small-caps could be interpreted as the beginnings of market jitters, said Chris Larkin, managing director of trading and investing product at E-Trade. That’s not to say that equities have run their course, it’s more like cyclical sectors like energy and financials are more attractive, while tech takes a backseat.

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