Stocks eked out small gains Wednesday as inflation worries and potential rate hikes stoked fears that the aging bull market may be slowing.
The Dow Jones industrial average ended a two-day slide Wednesday with an early surge that retreated into a small gain of a quarter of one percent. The early boost came on the heels of a better-than-anticipated private-sector jobs report.
The report by Automatic Data Processing said private employers added 234,000 jobs in January, a plus in the short term for markets. The amount outpaced expectations of 185,000 jobs.
The report helped send the Dow, Nasdaq and Standard & Poor’s 500-stock index slightly upward after a two-day retreat that saw Dow blue chips tumble 540 points, or about 2 percent.
Aerospace giant Boeing was helping lead the Dow back on Wednesday with a nearly 5 percent surge after posting earnings that beat Wall Street expectations. Microsoft was up in after-hours trading after beating estimates, while Facebook was down on reports that people were spending less time on the social media site.
Investors had a reality check early in the week as the Dow Jones industrial average sank 411 points at one point Tuesday, a full-throated market decline led downward by health-care stocks.
The talk on Wall Street on Wednesday quickly focused on the growing economy and what the Federal Reserve is going to do about it, if anything. Chairwoman Janet Yellen held interest rates where they are as she chaired her last meeting Wednesday.
Fed governor and Trump appointee Jerome Powell takes over from Yellen next week. He faces a challenge of managing interest rates without overheating the economy while at the same time not driving the country into a recession.
“Jay Powell may have the toughest job in Washington,” said Michael Farr, president of Farr, Miller & Washington, a D.C.-based money management firm. Powell “will not want to repeat the Fed’s errors of the late 1930s of becoming too aggressive, too fast.”
Some analysts said the early-week decline was triggered by investors taking chips off the table.
“It’s just profit-taking,” said Jeffrey Schulze, an investment strategist at ClearBridge Investments. “If you look at the markets over the past couple of years, we haven’t had a draw down over that time. We’ve gone the longest in over 100 years without a 5 percent pullback, so we think this is overdue.”
The CBOE Volatility Index, also known as the Wall Street Fear Index, a popular measure of the stock market’s expectation of volatility implied by S&P 500-stock index options, declined Wednesday after hitting its highest level since August 2017 on Tuesday.
Wall Street wags cited a number of culprits conspiring against the bull market. End-of-month portfolio rebalancing, anticipation over interest rates, oil prices, a too-good-to-be true earnings season — even questions over Apple’s iPhone — seemed to set in at the same time.
“It’s not any, one single head wind,” said Steven Hill, equity portfolio manager Foresters Financial. “Interest rates is a big one. The sharp increase in bond yields is finally becoming a topic of discussion. Higher yields have made bonds more attractive as investment alternatives to stocks. You got negative news on the Apple iPhone X sales. You’ve got health-care news today that created some uncertainty. Oil is off.”
The U.S. Treasury announced Wednesday that it was increasing the amount issued of 10-year and 30-year bonds by $1 billion, which comes at a time when the Fed is decreasing the bonds it purchases. A rise in the key 10-year Treasury rate is being watched closely by Wall Street as yields have climbed to the highest levels since 2014.
“We expect bond yields to continue to slowly drift higher,” said Charlie Ripley, an investment strategist for Allianz. “Investors have become too complacent with low interest rates. We are not saying yields are going to scream higher. But we should expect inflation pressures to continue to move higher and expect the Fed to remove policy accommodation.”
“Pay close attention to the Treasury refunding auctions,” Farr said. “If the auctions are too large, markets could get spooked.
Health care was uneven Wednesday after taking a beating on Tuesday after three giants of American business — Amazon (founded by The Washington Post owner Jeffrey P. Bezos), Berkshire Hathaway and JPMorgan Chase — teamed up to announce an ambitious yet vague effort to tackle U.S. health-care costs.
Pharmaceuticals giant Pfizer fell another 2 percent after dropping 3.1 percent Tuesday. Insurer Aetna fell and managed-care company UnitedHealth Group recovered slightly Wednesday after a 4.35 percent downturn Tuesday. Shares of Chevron and Exxon were up as crude oil prices drove higher.
Some analysts say stocks are overvalued, and a correction of 5 percent or more is overdue. There were predictions during Monday’s decline that the fallback could be as much as 10 percent in coming days.
James Norman, president at QS Investors, a quantitative asset manager that is a subsidiary of Legg Mason, remarked on the extraordinary calm in the markets during the past year.
“In 2017, the U.S. market was up over 22 percent, as measured by the S&P 500 index without experiencing a single month when the market declined — the first time this has happened since 1958,” Norman said in a one-page paper.
Alexandra Coupe, associate director at PAAMCO, said “low volatility may have persuaded equity investors to believe the trend is your friend. However, trend is more ‘frenemy’ than friend and can change course quickly.”