U.S. stocks rose on Tuesday, recouping most of Monday’s tech-driven selloff, while supply-and-demand friction pushed energy prices to multiyear highs.
The Dow Jones Industrial Average rose 1.3% and the S&P 500 gained 1.5%, figures that would more than offset Monday’s losses. The tech-heavy Nasdaq Composite Index jumped 1.7%, a day after falling more than 2%.
The shaky state of the stock market over the past month is both a result of typical seasonal volatility—September and October tend to see more selloffs than other months—but also somewhat inevitable. Backed by a Federal Reserve that has pursued a highly accommodative monetary policy, stock investors enjoyed an uninterrupted rally since last March, with the S&P 500 nearly doubling.
The recent spate of volatility was both unavoidable and relatively modest, said Michael Gayed, a portfolio manager and author of the Lead-Lag Report newsletter. Including Tuesday’s gains, the S&P is down less than 5% from its early September record. “If anything, this is long overdue,” he said.
Investors do have several worries: inflation, Covid-19’s continued effect on the economy and when the Fed will begin easing off the monetary levers. Lately they also have had to worry about whether the U.S. government will default on its debt as well as supply-chain snarls and surging commodities prices, which bring home the inflation issue to nervous investors.
“The equity markets today are worrying more about inflation, the possibility that we’re going to then see higher rates, and the fact that that does undermine the very lofty levels that they have been trading at,” said Rob Carnell, head of research for Asia-Pacific at ING.
What is important to watch now, Mr. Gayed said, is the bond market. The yield on the U.S. 10-year Treasury note is essentially the bond market’s reading on where inflation is headed. Its recent rise has shaken investors who had relied on the Fed’s assessment that high inflation was transitory.
“Markets could become very manic if the bond market says ‘we were wrong about inflation,’” he said.
The yield on the benchmark 10-year U.S. Treasury note rose to 1.526% Tuesday from 1.481% Monday. Yields move inversely to prices.
Tech stocks are especially sensitive to changes in bond yields, which affect the values that investors ascribe to far-off future profits. Higher bond yields have been the prime mover behind the selloff in tech stocks.
Those falls took a breather early Tuesday.
shares rose 2.1%, a day after an outage shut down its social media and messaging platforms. Facebook whistleblower Frances Haugen is set to testify before Congress on Tuesday.
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