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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