Stocks Shake Off Inflation Worries

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Stocks staged a rebound to finish higher Wednesday. Worries about inflation and slower economic growth still linger, but lower bond yields helped push Big Tech higher.

The Dow advanced 117 points, or 0.3% after seesawing the first two days of the week—dropping more than 300 points Monday before rebounding roughly the same number of points Tuesday to close at 34,314. The

S&P 500
rose 0.5%. The

Nasdaq Composite
gained 0.5%. All three indexes had been down more than 1% earlier in the day.

The S&P 500 had fallen to a level that was just over 5% below its all-time high, hit Sept. 2. That lower level is when investors have stepped in and blunted the losses for the index in the past month or so.

Technology stocks did the heavy lifting when stocks began rising. Not only did the Nasdaq post the best performance of the three major indexes, but tech stocks comprise a heavy portion of the S&P 500’s total market capitalization, so as tech stocks took off, so dd the index.

Earlier, the 10-year Treasury yield climbed to 1.55% from 1.53%, and was above the key level of 1.54%. Higher bond yields make future profits less valuable — and many fast-expanding tech companies are positioned to see large profits many years down the line.

The yield ended the day at 1.52%.

“The midday turnaround has to do with the movement in interest rates,” says John Kolovos, chief technical strategist at Macro Risk Advisors. “They looked like they were about to breakout to that 1.6% psychological level. They’ve been pushed down and has allowed the Nasdaq to rally.”

The 10-year yield has spiked from 1.31% since the end of September, when the Federal Reserve confirmed it will soon begin tapering, or reducing its bond buying. That would drive less money into the bond market, lowering bond prices and lifting their yields.

To be sure, many on Wall Street still expect it to keep climbing, muddying the near-term outlook for tech shares.

Meanwhile, worries about economic and earnings growth caused underperformance in the Dow, which is made up of mostly so-called cyclical stocks—ones that are economically sensitive.

The near-term economic picture is looking more bleak as inflation heats up. Factory orders in Germany fell 7.7% month over month, worse than the expected 2.1% decline, while retail sales in the European Union rose 0.3%, missing the expected increase of 0.8%. The supply shortages around the globe that are contributing to the productivity weakness are also creating inflation, which could eat into consumer demand. 

“Negative 7.7%…blame car chips, blame supply chain issues… The stagflation argument continues to grow,” wrote Andrew Brenner of NatAlliance Securities. 

Companies are reporting third-quarter earnings and already, some aren’t meeting sales expectations because of the shortages; others are reporting that their profit margins are getting squeezed.

Plus, the more persistent inflation is, the more likely the Federal Reserve will raise short-term interest rates next year. Stagnating economic growth and higher rates could, at some point, put a dent into the economy. The 2-year Treasury yield rose to 0.3% from 0.28%.

On Wednesday, the ADP jobs report showed the U.S. economy added 568,000 private-sector jobs in September, above expectations for 425,000. Investors are looking to the Bureau of Labor Statistics’ payrolls report out Friday for a final read on the economy. 

European sentiment was also weighed on amid a global energy crunch that has seen natural-gas prices in the region rise more than 500% since the beginning of the year—spiking 20% on Tuesday alone.

Elsewhere, the New Zealand central bank raised rates for the first time in seven years with a hike of the main cash rate by 25 basis points to 0.5%. The Reserve Bank of New Zealand warned about persistent cost pressures and how inflation was expected to rise above 4% in the near term.

Here are seven stocks on the move Wednesday:

Palantir Technologies

(ticker: PLTR) rose 1.6% after the company said late Tuesday it won an $823 million U.S. Army intelligence contract.

Novavax

(NVAX) was down 4.8%, following a 4.6% fall on Tuesday after the company announced a number of new leadership appointments.

United States Steel
Corp.
(X) and

Nucor

(NUE) were falling 8.7% and 2.8%, respectively, after Goldman Sachs downgraded both companies. U.S. Steel was cut to Sell from Neutral, while Nucor was cut to Neutral from Buy. 

American Airlines

(AAL) stock fell 4.3% after Goldman Sachs downgraded it to Sell from Neutral. The investment bank also downgraded

JetBlue Airways

(JBLU) to Neutral from Buy. JetBlue shares dipped 2.7%. Goldman cut its outlook for the two companies partly because of higher costs, including higher fuel costs as the price of oil has risen of late. 

Constellation Brands

(STZ) stock was falling 0.6% after the company reported a profit of $2.52 a share, missing estimates of $2.80 a share, on sales of $2.3 billion, in line with expectations. The company also issued strong earnings guidance and highlighted that demand for its products remains sturdy.

Write to Jacob Sonenshine at [email protected]