14 April 2024

U.S. Stocks Finish Higher as Fed Signals Timing for Taper and Interest Rate Hikes

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U.S. stocks staged a comeback from their September rout Wednesday after the Federal Reserve signaled that it could begin to reduce its bond purchases soon and raise interest rates as early as next year.

All three major U.S. indexes finished the day higher, marking the first day of gains for the S&P 500 and Dow Jones Industrial Average after a punishing four-session losing streak. Both indexes finished the day up 1% to record their largest one-day gain since July.

The rally marked a sharp turnaround from earlier this week, when major stock indexes tumbled due to fears that a default by highly indebted real-estate developer China Evergrande Group could cause a widespread pullback in riskier assets across markets. On Monday, indexes in Asia, Europe and the U.S. sank, with the S&P 500 and Nasdaq Composite suffering their worst one-day falls since May. Indexes in the U.S. finished mixed Tuesday after a choppy trading session.

On Wednesday, however, some of the fears spurred by Evergrande started to subside, and investors turned their attention to the Fed following the conclusion of its two-day September meeting. In a statement issued after its meeting, the Fed said that if economic progress continues broadly as expected, “a moderation in the pace of asset purchases may soon be warranted.” Fed Chairman Jerome Powell added later that officials generally agreed that “a gradual tapering process that concludes around the middle of next year is likely to be appropriate.”

The U.S. central bank slashed its short-term benchmark rate to near zero during the early stages of the Covid-19 pandemic last year. It also has been purchasing $120 billion in bonds each month. The central bank on Wednesday left interest rates unchanged, though new projections released showed half of 18 officials expect to raise interest rates by the end of next year, up from seven officials in June.

The Fed’s decision sent stocks rocketing higher shortly after 2 p.m. ET, with the Dow gaining as much as 520.58 points. But as Mr. Powell spoke at a news conference in the afternoon, indexes bounced around before eventually paring their gains for the day.

The blue-chip index finished the day up 338.48 points, or 1%, to finish at 34258.32. The S&P 500 added 41.45 points, or 1%, to end at 4395.64. The Nasdaq Composite jumped 150.45 points, or 1%, to 14896.85.

“Markets are keenly aware of the effect of interest-rate increases on cash flow, earnings and all kinds of things,” said Jamie Cox, managing partner for Harris Financial Group, of the market’s reaction to the Fed statement. “Chairman Powell has said the test for [an interest rate increase] is quite a bit higher than it is for tapering.”

The Fed’s stimulus programs have been credited for helping keep the stock market churning higher, which has pushed the S&P 500 to 54 records this year. But investors have been increasingly nervous in recent weeks about the Delta variant of the coronavirus, stretched valuations and signs that the U.S. economy’s growth is slowing. A chorus of analysts recently warned that the U.S. stock market was ripe for a pullback.

For much of this month, U.S. stocks have edged lower. And this week, Evergrande became a largely unexpected catalyst that sent stocks sliding. Evergrande, a giant real-estate developer in China, is on the brink of collapse after years of rapid expansion and aggressive borrowing. Many investors fear its crisis could spread financial pain far and wide.

Evergrande’s problems are seen as a high-stakes test of whether the Chinese government will step in to stave off ripple effects that could affect the country’s growth and weigh on the global economic recovery.

Some money managers said investors found relief Wednesday after Evergrande’s flagship property business said it would make an interest payment on an onshore bond. However, another test will come Thursday when an interest payment on a bond denominated in dollars is due.

“I think the ability for Evergrande specifically to cause a major financial contagion…is small and that those fears were overblown,” said Michael Arone, chief investment strategist for State Street Global Advisors. “However, I do think that what’s been occurring in China for really the last year is resulting in an economic slowdown within China that will have implications for the global economy.”

Gains in the S&P 500 on Wednesday were led by energy shares, extending the sector’s recent outperformance. Occidental Petroleum, Diamondback Energy and Marathon Oil each gained more than 5%. Financials stocks also rallied.

FedEx shares lost $22.99, or 9.1%, to end at $229.08 after the delivery giant spent an additional $450 million due to problems attracting workers in its latest quarter, contributing to an 11% drop in profit. Shares of Adobe declined by $19.81, or 3.1%, to end at $626.08, despite the software company reporting higher profit and record revenue in the latest period.

Shares of Facebook slid by $14.27, or 4%, to close at $343.21, weighing on the S&P 500’s communication services sector, which finished lower for the day. The utilities group was the only other sector to fall Wednesday.

In the bond market, yields on all but the longest-term U.S. government bonds climbed after the meeting, reflecting greater clarity about when the Fed will start and finish tapering its bond purchases and even when it might start raising short-term interest rates.

The yield on the benchmark 10-year U.S. Treasury note settled at 1.332%, according to Tradeweb, up from 1.306% just before the Fed released its post-meeting policy statement and 1.323% Tuesday. Yields on shorter-term bonds, which are especially sensitive to changes in monetary policy, rose more, with the two-year yield climbing to 0.240% from 0.214% Tuesday.

Futures for Brent crude, the benchmark in international energy markets, rose 2.5% to $76.19 a barrel.

Overseas, China’s Shanghai Composite finished up 0.4%. Markets in Hong Kong were closed for a holiday.

In Europe, the pan-continental Stoxx Europe 600 added 1%.

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