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Stocks fall as Powell reiterates Fed taking away easy policy

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U.S. stocks were under pressure on Tuesday as Federal Reserve officials made more statements hinting at fighting inflation aggressively in the year ahead.

The Dow Jones Industrial Average fell 114 points, or 0.3%. The S&P 500 ticked down 0.1%, and the Nasdaq Composite ticked up 0.2%.

Stocks have been volatile to start the year, as rising interest rates have put pressure on equities. The benchmark 10-year Treasury yield traded near 1.78% on Tuesday. The 2-year yield, which is more directly impacted by the Fed’s upcoming decisions, jumped to roughly 0.92%.

“The market is grappling with a broad-based rotation and the potential for a hastened pace of rate hikes, which is leading to volatility,” Greg Marcus, managing director at UBS Private Wealth Management, said in a note.

Large tech stocks were mixed in early trading Tuesday, with chipmaker Nvidia and Alphabet falling while Amazon and Tesla rose nearly 1%. Struggles for health care stocks, including Merck and Procter & Gamble, weighed on the Dow. Shares of IBM fell more than 4% after the stock was downgraded by UBS.

Early gainers included Illumina, which rose 6% after the genomic sequencing company issued a 2022 revenue outlook that was ahead of consensus. Juniper Networks rose 2.5% after Bank of America upgraded the stock.

On the Federal Reserve front, Chair Jerome Powell testified before a Senate committee on Tuesday as part of his re-confirmation process. Powell said that he expected a normalized supply chain to help ease inflation pressures in 2022 but said the Fed would not be afraid to hike rates further than projected if inflation remains high.

“If we have to raise interest rates more over time, we will. We will use our tools to get inflation back,” Powell said.

Comments from other Fed officials on Tuesday also pointed toward an aggressive stance to fight inflation.

On Monday, the Nasdaq turned slightly green into the close after a day of continued declines from the previous week’s sell-off, sparked by a rise in bond yields and worries about upcoming actions by the Federal Reserve. It closed 0.05% higher and erased a 2.7% loss. Meanwhile, the Dow after being down more than 500 points ultimately lost 162 points, or 0.4%, while the S&P 500 slid 0.1%.

On Monday, JPMorgan’s Marko Kolanovic said markets can withstand higher yields, as well as omicron, and that investors should buy the dip in the tech stocks.

“The pullback in risk assets in reaction to the Fed minutes is arguably overdone,” he said in a note. “Policy tightening is likely to be gradual and at a pace that risk assets should be able to handle, and is occurring in an environment of strong cyclical recovery.”

Jim Paulsen, chief investment strategist at the Leuthold Group, said that while the stock market is likely to encounter a correction this year – and last week’s action could perhaps have been the start of one – it will be met by strong company fundamentals.

“Historically, the stock market has suffered some nasty ‘temper tantrums,’ and numerous rate hikes eventually led to recessionary bear markets,” Paulsen said in a note Monday evening. “However, the current focus among investors may be misplaced. The stock market’s response may have less to do with the timing and number of rate hikes than it does with the ‘direction’ of real earnings.”

Earnings season will be in full swing by the end of this week with the big banks set to report starting Friday. Grocery chain Albertson’s reported results that beat expectations on the top and bottom lines on Tuesday morning.

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