Stocks Fall After an Upbeat Start of Week, Futures Rise Modestly

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Key Takeaways

• Stocks snap a three-day winning stretch, futures on Wednesday indicate a higher open
• The Federal Reserve maintains current monetary policy, despite inflation worries

US stocks declined on Tuesday, following a strong start of the week when all three major indexes were lifted by renewed positive expectations for economic growth, despite inflation risks. On Tuesday, however, equities wobbled and struggled to gain upside momentum, even though during the session, the major benchmarks climbed to higher grounds.

Buying momentum was not enough to push stocks higher into the closing bell and in the last hour of trading, the main indexes dipped below the flatline, ending the day in negative territory. The Dow Jones Industrial Average snapped a three-day winning streak and fell 0.24%, or 81.52 points, to 34,312.46. The S&P500, also ending three days of gains, declined 0.21%, or 8.92 points, to close the day at 4,188.13. The Nasdaq Composite edged lower by 0.03%, or 4 points, to 13,657.17.

All three indexes gave up earlier gains, after Fed officials assuaged investors’ fears on Monday, saying inflation will be transitory. On the other hand, some market participants became more uncertain over the near-term valuation of the stock market due to the Fed’s hands-off approach to the economy.

Fed’s Commitment Reiterated

The Federal Reserve recommitted on Monday to keep the current monetary policy unchanged, which could translate to higher inflation that can stamp outgrowth. Yesterday, Fed vice-chair Richard Clarida reassured the market that the central bank’s board does not see inflation heading higher than 2% for 2021 or 2022. The vice-chair also noted that “it may well be in the upcoming meetings, we’ll be at the point where we can begin to discuss scaling back the pace of asset purchases”.

Higher prices, combined with the ongoing monetary stimulus of $120bn in bond purchases per month, could cause the economy to overheat. As a result, the US central bank could be forced to suddenly tighten its policies and taper its asset purchases sooner than planned.

The Federal Reserve has been causing market jitters for the past few months. Despite the growing nervousness in the market environment, the Fed is largely expected to hold back from making any changes to its policies for the foreseeable future. Fed policymakers have vowed to maintain interest rates ultra-low to facilitate borrowing that would accelerate the economic recovery. Federal Reserve Chairman Jerome Powell has stated the central bank will change course if it sees inflation going out of control. He had also made sure to note that to speed up the post-pandemic recovery, the central bank will tolerate rising prices, despite the threat to devalue the US dollar or the stock market.

The five-year forward inflation rate, one of the primary measures used by the Fed to track price rises, dipped to 2.25% after climbing as high as 2.37% in early May. One of the most commonly used inflation indexes, the consumer price index (CPI), hit 4.2% in the 12 months to April, the biggest jump since 2008. The increase was more than double the Fed’s 2% target.

On Wednesday, US equity futures point higher by a quarter of a percent. Dow futures, S&P futures, and Nasdaq futures are all positive by over 0.25% in pre-market trading, with S&P futures leading the pack, higher by 0.30%.