Stocks are rallying after slumping earlier in the day as Wall Street.
The Dow Jones Industrial Average fell almost 2% in early trading but recovered most of that ground by late afternoon, with the index closing down only 0.2% at 34,298. The broader S&P 500, which slumped 2.4% when the markets opened, pared its losses to end with a loss of 1.2%. The tech-heavy Nasdaq saw a larger decline, falling 315 points, or 2.3%.
Prior to Tuesday, the S&P 500 had already lost 8% of its value this year, placing it just shy of a correction. But the tech-heavy Nasdaq Composite had declined more than 12% this year and about 14% from its November peak, placing it squarely in that category.
Markets also whipsawed on Monday, with the Dow dropping more than 1,100 points before recovering to close in positive territory and the S&P 500 and Nasdaq also swinging wildly from heavy losses earlier in the session to modest gains by the close.
Market volatility has flared this month as investors weigh how aggressively the Federal Reserve, which is holding a policy meeting this week, may raise interest rates to combat rising inflation. Consumer, the biggest increase in nearly 40 years.
"It almost feels like the market is behaving a little incoherently, not knowing which way to go – go down because the Fed is tightening or go up because the Fed is finally acting to rein in inflation and is loading up on ammunitions while economic growth remains strong," Anu Gaggar, global investment strategist for Commonwealth Financial Network, an independent brokerage firm, said in an email.
Historically, stocks have tended to fall sharply when core inflation, which excludes volatile food and energy prices, hits 5.5%, according to UBS analysts. In 2021, core inflation as measured by the Consumer Price Index rose 5.5% from the previous year.
The surge in Omicron variant cases may further fuel inflation and add to supply chain woes, crimping economic growth and corporate earnings, Goldman Sachs analysts warned in a recent research note, adding that wages may also rise faster than expected.
The upshot is that the Fed "is likely to be looking at a hot inflation dashboard at its next few meetings," the analysts said. That increases the chances that the central bank will "take some tightening action at every meeting until the inflation picture changes," and may increase interest rates more than four times in 2022.
Many Wall Street analysts expect the Fed to signal that it plans to start raising rates in March when policymakers issue its policy statement on Wednesday. That would slow economic growth, in part by raising borrowing costs for consumers and businesses.
Meanwhile, millions of Americans are grappling with reduced income now that federal COVID-19 relief programs have expired, including.
"Fiscal and monetary tightening, together, is tough on financial assets when they're coming off of a rip-roaring party from stimulus," said Barry Bannister, chief equity strategist at Stifel.
Investors are also monitoring tensions between Russia and the West over fears that Moscow is planning to invade Ukraine, with NATO outlining.
The Pentagon ordered 8,500 troops on higher alert to potentially deploy to Europe as part of a NATO "response force" to a military move on Ukraine. President Joe Biden has consulted with key European leaders, underscoring U.S. solidarity with allies there.
Along with monetary policy and geopolitical risks, markets are focusing on corporate earnings as reporting season kicks off. General Electric shares slumped 5.8% in late Tuesday trading after reporting a fourth-quarter loss of $3.8 billion. Investors are watching for signs of slowing demand as the Omicron variant impacts business and consumers.
"In economic news, business activity in the U.S. decelerated this month to its slowest pace in 18 months, according to IHS Markit data," said Craig W. Johnson of Piper Sandler in a research note.
—With reporting by the Associated Press.
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