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Dow erases 500-point rise as stock-market bounce gives way

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Major U.S. stock benchmarks ended mixed Tuesday, with the Dow Jones Industrial Average booking a fourth straight day of losses, on the eve of a key inflation reading.

How did stock indexes perform?
  • The Dow Jones Industrial Average DJIA, -0.26% fell 84.96 points, or 0.3%, to close at 32,160.74, in a fourth straight day of losses that marked its largest four-day percentage decline since the stretch ending October 29, 2020.
  • The S&P 500 SPX, +0.25% gained 9.81 points, or 0.2%, to finish at 4,001.05, snapping a three-day losing streak.
  • The Nasdaq Composite COMP, +0.98% advanced 114.42 points, or 1%, to end at 11,737.67, also snapping a three-day losing streak.

On Monday, the Dow fell 654 points, or 2%, while the S&P 500 declined 3.2%, to close below the 4,000 threshold and at its lowest since March 31, 2021. The Nasdaq Composite plummeted 4.3% to its lowest finish since November 2020.

What drove markets?

The stock market has been choppy as investors gauge whether the U.S. economy will have a “soft” or “hard” landing as the Federal Reserve seeks to bring high inflation under control by lifting interest rates, according to Steve Chiavarone, senior portfolio manager and head of multi-asset solutions at Federated Hermes.

“It’s a jump ball right now,” said Chiavarone, in a phone interview Tuesday. “Volatility is going to reign for some time.”

Under a so-called soft landing, the Fed manages to tame inflation without causing a recession, while a hard landing entails the central bank getting inflation under control through aggressive rate hikes that trigger an economic recession. Under a third scenario — stagflation — the Fed tightens monetary policy enough to cause a recession but still not enough to tame inflation, according to Chiavarone. He said “the market is trying to figure out which of those three is most likely.”

Read: Investors haven’t begun to price in recession — Here’s how far the S&P 500 could fall

Uncertainty around the economic outlook as the Fed pursues an aggressive cycle of rate increases and other measures aimed at reining in inflation running at its hottest in more than four decades has unsettled investors, according to analysts.

“Markets are clearly confused about what the Fed will do this year and just how aggressive it will get. That can be seen in the volatility in expectations for where the fed funds rate will be at the end of 2022, as seen in fed funds futures. And it is reflected in stock market volatility, with the VIX above 30,” said Kristina Hooper, chief global market strategist at Invesco, in a note.

The VIX is the Cboe Volatility Index VIX, -5.06%, a measure of expected S&P 500 volatility over the next 30 days, which is trading above its long-term mean near 20.

If anything, the corporate earnings news since Monday’s close has been negative, with steep earnings-related declines for companies including lending platform Upstart Holdings Inc. UPST, -56.42%, online marketplace Groupon Inc. GRPN, -12.52% and fuel-cell maker Plug Power Inc. PLUG, -5.53%.

See: Upstart stock could shed more than half its value as earnings highlight ‘perfect storm of headwinds’

“You’re going to continue to see companies like Peloton PTON, -8.70% get punished over earnings misses,” said Tim Pagliara, chairman and chief investment officer at CapWealth Advisors, by phone Tuesday. “I wouldn’t get too excited about anything that’s happening in the broader market because there’s still a lot of danger” in individual stocks that have been “so very, very overvalued.”

The broader issue confronting the market is that the Federal Reserve will keep tightening until it sees signs that inflation is getting under control, and there’s no indication that’s anytime soon.

The ICE U.S. Dollar Index DXY, -0.07%, a measure of the currency against a basket of six major rivals, was up about 0.3% Tuesday, while Treasury yields continued a pullback from 3 1/2-year highs, with the rate on the 10-year note TMUBMUSD10Y, 2.985% falling 9 basis points to 2.990%.

“There is one potential catalyzer this week, that could eventually slow down the market selloff: U.S. inflation data due Wednesday. The consumer price index is expected to have eased to 8.1% in April from 8.5% printed a month earlier. A softer inflation is the only thing that could give hope to investors,” said Ipek Ozkardeskaya, senior analyst at Swissquote Bank.

Read: Under pressure due to inflation, Biden blasts Republicans for ‘ultra-MAGA’ plan that would ‘raise taxes on working families’

Which companies were in focus?
How did other assets fare?
  • Oil futures lost ground, with the U.S. benchmark CL.1, +1.87% finishing more than 3% lower at $99.76 a barrel, falling back below the $100 threshold for the first time since April 27. Gold futures GC00, -0.22% fell, with gold for June delivery settling nearly 1% lower at $1,841.00 an ounce.
  • The Stoxx Europe 600 SXXP, +0.68% closed up 0.7%, while London’s FTSE 100 UKX, +0.37% gained 0.4%.
  • The Shanghai Composite SHCOMP, +1.32% rose 1.1%, while the Hang Seng Index HSI, +1.20% fell 1.8% and Japan’s Nikkei 225 NIK, +0.32% lost 0.6%.

—Steve Goldstein contributed to this report.