A broad recovery capped a tumultuous day of trading on Wall Street on Friday, snapping the market’s three-day losing streak.
The S&P 500 added 2% after bouncing back from a 1% drop that accompanied a 1% surge at the start of trading. Other stock indices experienced similar zigzags but ended the year with strong gains.
After starting the week with the S&P 500’s largest gain since June, the late-afternoon rebound helped to offset some of the market’s losses. The index ended the week 0.8 percent higher, its first weekly increase in three weeks, after briefly falling into the red for the year on Thursday.
The market’s most recent gyrations occurred as investors tried to find out what an upbeat economic report and the recent rise in bond yields meant for the market.
“Investors will eventually come to the conclusion that they’ll be able to take the good with the bad,” said Sam Stovall, CFRA’s chief investment strategist. “The bad news is that interest rates are increasing, while the positive news is that the economy is improving.”
The S&P 500 index increased by 73.47 points to 3,841.94. The Dow Jones Industrial Average rose 572.16 points to 31,496.30, up 1.9 percent. It had been down 157 points earlier. The Nasdaq composite rose 196.68 points to 12,920.15, up 1.6 percent. Earlier in the day, the tech-heavy index fluctuated between a gain of 1.2 percent and a loss of 2.6 percent.
Smaller company stocks, as they have done all year, outperformed the broader market. The Russell 2000 index rose 45.29 points to 2,192.21, up 2.1 percent.
The source of all the ambiguity On Friday, the government released a report showing that employers added hundreds of thousands of workers last month, much more than economists had expected. This is a positive sign for the economy, and it has seen Treasury rates rise, with the 10-year yield briefly exceeding 1.60 percent.
The yield later dropped back from its midday peak, ending the day at 1.56 percent, just a smidge higher than the day before. It is also well above the 0.90 percent mark reached at the end of last year.
Although the employment report was positive in terms of new jobs created, wage growth — a leading indicator of inflation — increased in line with expectations last month. For the time being, this could have alleviated some bond investors’ inflation concerns.
“That meant, ‘OK, at least this study doesn’t point to a spike in inflation,’” Stovall explained.
When the government releases its new consumer and wholesale price data next week, the opinion will shift.
Even though the coronavirus pandemic made things very grim at the time, the stock market continued to rise for about a year on hopes of an economic rebound. The market is unsettled now that the recovery is far closer on the horizon, because one of the key underpinnings for the amazing run is in jeopardy: ultralow interest rates.
With growing expectations for the economy’s growth and the inflation that will follow it, yields have been marching higher. As more people get COVID-19 vaccinations, companies restart, and Congress gets closer to pouring another $1.9 trillion in financial assistance into the economy, economists have been updating their estimates for this year.
The fear is that inflation will accelerate, or that something else will happen to drive yields even higher.
Wall Street is more concerned with the rate at which Treasury yields have risen than the actual amount, which is still low in comparison to history.
Higher yields bring downward pressure on stocks in general, partly because they divert dollars away from the stock market and into bonds instead. As a result, investors are less likely to pay exorbitant stock rates.
The strain is greatest on stocks that appear to be the most expensive in terms of earnings, as well as those that have been bid up on the expectation of rapid growth in the future. Most stocks across the market, according to critics, seem to be overvalued as values have risen much faster than earnings, and concerns about a potential bubble have increased.
The downturn has been particularly harsh on tech stocks and other high-growth businesses. For most of the pandemic, and in the years leading up to it, they rose faster than the rest of the industry. Tesla was the S&P 500’s heaviest dragging weight on Friday. The stock fell 3.8 percent, bringing its year-to-date loss to 15.3 percent.
It’s yet another example of the market’s growing dominance of Big Tech stocks. The general consensus on Wall Street is that most stocks will prosper if inflation remains under control, as the Federal Reserve’s chair and many economists predict.
A stronger economy will result in higher profits for businesses, allowing them to maintain or increase their prices even as interest rates rise.
The vast majority of stocks in the S&P 500 had recovered by Friday afternoon. Some of the biggest winners were energy companies. After the price of U.S. crude oil rose 3.5 percent, Diamondback Energy gained 4.9 percent and Chevron gained 4.3 percent.
Tech stocks will almost certainly see an increase in earnings, but not to the same extent as firms whose operations are inextricably linked to the health of the economy, such as banks or travel agencies.
However, Big Tech stocks have become so large that their movements can obscure what’s going on in the market as a whole. Since five Big Tech stocks account for more than 21% of the S&P 500 by market value, weakness in the sector will drag down S&P 500 index funds, even though many of the stocks inside it are increasing.
All of the bond market’s major moves have drawn more attention to the Federal Reserve, whose chair said this week that the recent rise in yields has caught his attention. When he didn’t propose anything more forceful to stop the development, he frustrated some investors. This has heightened expectations for the Fed’s next policy meeting, which begins on March 17 and ends on March 17, and whether Powell can provide any further guidance on what actions the Fed might take next.