Stocks were mostly higher Tuesday afternoon, after flipping between gains and losses as investors weighed a continued rise in bond yields and worries over the continued spread of COVID-19.
Stocks pulled back Monday after ending last week at record levels. The tech-heavy Nasdaq Composite led the way lower, falling 1.3%, while the Dow fell 0.3% and the S&P 500 declined 0.3%.
Stocks were struggling for direction as investors watched a rise in U.S. government bond yields this month as well as efforts to impeach President Trump for his role in encouraging a violent mob to attack the Capitol last week could hamper efforts to craft another round of fiscal stimulus.
But analysts said investors were largely shrugging off political risks around impeachment and prospects for further civil unrest as President-elect Joe Biden’s inauguration approaches on Jan. 20.
Equities appeared to be underpinned by optimism over prospects for another large round of fiscal aid after Biden takes office with Democrats in control of the Senate and House. Last Friday Biden called for extra financial relief for Americans “now” after the December U.S. jobs report showed losses for the first time in eight months.
Video: Hopes for ‘accelerated’ stimulus are driving stocks higher: Strategist (CNBC)
But a Treasury market selloff saw the 10-year Treasury note recording its largest weekly rise since June in the past week and the spread between the 10-year and 2-year yields — a measure of the yield curve — briefly hitting its widest levels since 2017.
Some investors have taken the recent moves in the bond market as a sign investors see a potential surge in inflationary pressure, which could prompt the Federal Reserve to begin scaling back its asset purchases earlier than expected, perhaps before year-end.
But skeptics doubt that such concerns are likely to be realized, particularly after last week’s disappointing December jobs report, which showed a fall in nonfarm payrolls as the resurgent COVID-19 pandemic took a toll on hiring.
“Despite the fact that some commentators are arguing that there may be movement towards less accommodation in the Fed’s asset purchases and forward guidance, the data just doesn’t support any moves to reduce the degree of policy accommodation the Committee has put in place nor any or changes in guidance at this next meeting,” wrote Robert Eisenbeis, chief monetary economist at Cumberland Advisors, in a Tuesday note.
The steepening bond yield curve is helping bank stocks, with the S&P 500 Financials Sector on pace for its first record close since January last year, according to Dow Jones Market Data. JPMorgan Citi and Wells Fargo report earnings on Friday.
Meanwhile, stocks may be due for some consolidation after surging to a new round of records last week.
“The fall in stocks yesterday needs to be put in the context of the large gains that were posted last week,” said David Madden, market analyst at CMC Markets, in a note.
“For some time there was chatter that equities were looking lofty so a move to the downside wasn’t exactly a surprise,” he said. “In recent sessions, the speculation that President-elect Joe Biden will map out new stimulus plans has dominated the headlines. Also the vaccine news is assisting the upbeat sentiment.”
In U.S. economic data Tuesday, the small-business optimism index compiled by the National Federation of Independent Business fell by 5.5 points to 95.9 last month, marking its lowest level since last May. The Labor Department said U.S. job openings fell slightly to 6.53 million in November.