Stocks fall for second straight day after more hot inflation data, Fed meeting begins

U.S. stocks slipped during morning trading Tuesday as new inflation data continued to show a sharp rise in prices.

The S&P 500 declined 0.5% while and Nasdaq Composite was off by 1%. The Dow Jones Industrial Average rose 87 points, boosted by bank stocks.

The slide for stocks comes after the November reading for the producer price index showed a year-over-year increase of 9.6%, the fastest pace on record and above the 9.2% expected by economists, according to Dow Jones. The index rose 0.8% month over month, above the 0.5% expected.

The hotter-than-expected inflation reading comes as the Federal Reserve also kicks off its two-day meeting on Tuesday. The central bank will release a statement on Wednesday with quarterly projections for the economy, inflation and interest rates. Chairman Jerome Powell will also hold a press conference.

Tesla shares were among the biggest early droppers on the S&P 500, falling 2.3% after CEO Elon Musk announced that that he has sold another $906.5 million in shares.

Fellow automaker Ford also fell, down 2.7% following news that by 2030 Toyota would be investing $35 billion into battery-powered electronic vehicles, a space where Ford has sought to establish itself as a leader.

On the other hand, bank stocks rose along with interest rates, with Goldman Sachs and JPMorgan Chase each adding more than 1%.

Investors will be watching closely this week for commentary around if the Fed plans to accelerate the end of its bond-buying program. At present, the central bank’s asset purchase program will end in June 2022, but several officials have spoken about ending the purchases sooner.

The latest CNBC Fed Survey showed that investment professionals and economists expect the Fed to wind down its asset purchases by March and begin rate hikes in June.

Wolfe Research strategist Chris Senyek said in a note to clients on Tuesday that the Fed will need to walk a fine line to avoid spooking the markets.

“Fed Chair Powell has a very difficult communication job ahead of him tomorrow afternoon. We’re in line with consensus and expect the Fed to end its tapering program in March/April and start hiking in May,” the note said. “If Fed Chair Powell emphasizes that the FOMC remains flexible, the ‘Fed put’ should remain in place. However, if his tone is overly hawkish, it could turn into a disaster like December 2018.”

Morgan Stanley CEO James Gorman told CNBC on Monday that he thinks the central bank should start raising rates soon.

“The Federal Reserve would be better off storing away some of the rate increases, so when the inevitable turn down comes, you’ve got some ammunition to fight with,” he said. “At the moment, at zero interest rates, we have no ammunition.”

On the Covid front, Pfizer announced that its drug aimed at treating patients with the virus proved effective in a final analysis, including against the new omicron variant.

Tuesday’s moves followed a rough Monday for the stocks, which saw the Dow slide 0.89%, or 320 points, while the S&P 500 dipped 0.9%. The Nasdaq Composite fell 1.39% as investors rotated out of technology stocks with high valuations.

Looking forward, some strategists, including LPL Financial’s Ryan Detrick, believe there’s upside ahead for equities.

“We believe pent-up demand, gradual improvement in supply chain challenges, solid labor force growth, and productivity gains will all contribute to another year of above-trend economic growth in 2022,” he wrote in a note to clients. “COVID-19-related risks remain and the potential for a policy mistake may be elevated as the economy moves towards normalization, but we think the overall environment will be supportive of business growth and ultimately equity markets,” he added.

Despite Monday’s decline for equities, the S&P 500 entered Tuesday roughly 1.6% below its Nov. 22 all-time intraday high. The Dow is 2.5% below its record, while the Nasdaq Composite is about 5% under its high-water mark. The Russell 2000 index is down a sharper 11.3% since its Nov. 8 high.

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