Stocks lose steam in final hour of trading as Wall Street fights to sustain a comeback

FAN Editor

Stocks rose Wednesday, building on strong gains from the previous session as investors tried to recover some of this year’s steep losses. Traders also weighed comments from Federal Reserve Chair Jerome Powell, who reiterated the central bank’s stance to fight inflation.

The broader market index climbed 0.7%. The Dow Jones Industrial Average gained 161 points, or 0.5%. The Nasdaq Composite jumped 0.8%.

On Tuesday, the major averages all rallied more than 2%.

Those gains followed the worst weekly loss for stocks since 2020 after more aggressive monetary tightening from the Federal Reserve sparked concerns of a recession on Wall Street. Last week, the central bank raised rates by 0.75 percentage point and hinted another increase of that magnitude was possible next month.

“Broadly, yesterday and today strike me as kind of just a typical relief rally after the really aggressive downside from last week,” said Ross Mayfield, investment strategy analyst at Baird. “Nothing meaningful has shifted as we tried to search for where the actual bottom of this bear market is.”

Fed Chair Powell on Wednesday played down recession concerns and told Congress the central bank has the “resolve” to tame inflation that has surged to 40-year highs.

“At the Fed, we understand the hardship high inflation is causing,” the Fed chief said to the Senate Banking Committee. “We are strongly committed to bringing inflation back down, and we are moving expeditiously to do so.”

Powell added that the Fed will stay the course until it sees “compelling evidence that inflation is moving down.” He also said achieving a soft landing for the economy without a recession has become “significantly more challenging.”

The Federal Reserve’s shift last week to a more aggressive inflation-fighting stance unnerved investors who worried the central bank would rather risk a recession than endure persistent high inflation.

“Inflation remains the biggest risk to financial assets, and Jerome Powell has made his position abundantly clear: The Fed will continue to raise interest rates until inflation begins to wane. Until then, a sustainable rally for risk assets is hard to imagine,” wrote Robert Schein, chief investment officer of Blanke Schein Wealth Management.

“Tight monetary conditions will continue to be a headwind to financial markets until the Fed gives the greenlight,” Schein continued.

Oil and bond yields fell on Wednesday, relieving some of the pressure they’ve given stocks lately. Brent crude futures dropped 2% to $112.41 per barrel. West Texas Intermediate, the U.S. oil benchmark, declined 2.2% to $107.02 per barrel.

The benchmark 10-year note yield fell to below 3.2%. Yields move inversely to prices.

A peek into the S&P 500 showed that the real estate and health care sectors drove outperformance in the broader market index, with the two sectors each up 2%. Shares of Crown Castle and American Tower jumped 5% and 4%, respectively. Shares of Moderna surged 7%.

Consumer discretionary stocks such as homebuilders Lennar and D.R. Horton each jumped 3%.

Meanwhile, expectations of a pending recession continued to grow on Wall Street this week. Citigroup raised chances of a global recession to 50%, pointing to data that consumers are starting to pull back on spending.

“The experience of history indicates that disinflation often carries meaningful costs for growth, and we see the aggregate probability of recession as now approaching 50%,” read a note from Citigroup.

Goldman Sachs believes a recession is becoming increasingly likely for the U.S. economy, saying that the risks are “higher and more front-loaded.”

“The main reasons are that our baseline growth path is now lower and that we are increasingly concerned that the Fed will feel compelled to respond forcefully to high headline inflation and consumer inflation expectations if energy prices rise further, even if activity slows sharply,” the firm said in a note to clients.

Meanwhile, UBS said Tuesday in a note to clients that it does not expect a U.S. or global recession in 2022 or 2023 in its base case, “but it’s clear that the risks of a hard landing are rising.”

“Even if the economy does slip into a recession, however, it should be a shallow one given the strength of consumer and bank balance sheets,” UBS added.

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