S&P 500 Edges Lower After Monday’s Rally

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U.S. stocks wobbled Tuesday, halting Monday’s blockbuster rally as investors continued to grapple with volatility in both shares and bonds.

The S&P 500 lost 0.1% in recent trading, pulling back after it surged 2.4% Monday to log its best day since June. The broad benchmark index was weighed down, in part, by a continued decline in technology stocks, which also sent the Nasdaq Composite tumbling 0.7%.

The Dow Jones Industrial Average, meanwhile, ticked up about 30 points, or 0.1%, after swinging between gains and losses throughout the day. The blue-chip index lost more than 150 points in intraday trading before reversing course.

Investors say their focus is squarely on central bank officials for cues on how monetary policy may shift down the road. That will determine their appetite for government bonds and for inflation-adjusted returns. A flood of easy money by the Federal Reserve since the pandemic hit last spring has helped subdue returns on bonds and fueled a rally in stock markets for much of the past year.

This phenomenon seemed to halt in recent weeks: money managers adjusted their portfolios in anticipation of an economic rebound and a potential increase in inflation, prompting a selloff in government bonds. Yields jumped last week as bond prices fell, leading to jitters in stocks. Bond markets have since stabilized, and stocks surged higher Monday.

“We’re just taking a breather after yesterday,” said Fahad Kamal, chief investment officer at Kleinwort Hambros.

“The state of the bond market is driving everything,” he added. “The central banks continue to be the real pivot in markets right now: as long as they continue to buy enormous amounts of bonds in the market, the upside move [in yields] is capped.”

The yield on the 10-year U.S. Treasury bonds fell to 1.421%, from 1.444% on Monday. Still, that is sharply higher from this year’s closing low on Jan. 4 of 0.915%.

The recent volatility in markets “shows how hostage we are to policy remaining exactly where it is,” said Georgina Taylor, a multiasset fund manager at Invesco. “There is no real room for policy tightening to take hold: we still need that to be supportive of the economic recovery.”

Fed officials have so far suggested the climb in yields reflects expectations for an economic recovery. And Fed Chairman

Jerome Powell

told members of Congress last week that the central bank will continue to maintain low interest rates and continue asset purchases until more progress has been made on its employment and inflation goals.

“We think that the coming days and weeks will likely be pivotal,” and could see central banks taking steps beyond their verbal interventions, said Peter Schaffrik, a global macro strategist at RBC Capital Markets.

Shares of technology companies were among those that tumbled Tuesday, continuing a trend that began last month. Technology stocks in particular are sensitive to rising rates, in part because they can crimp the value of future profits. Apple lost 1.4%,


fell 2.8% and


slid 0.8%.

Still, there were bright spots in the market: Payments company Square climbed 5.7% after it said its industrial bank has begun operating.

And companies that tumbled sharply during last year’s market rout also surged. Cruise companies Carnival and

Royal Caribbean Group

both added 3% or more. Investors and analysts expect an increase in consumer demand for travel services such as cruise lines once larger swaths of the population receive the Covid-19 vaccine.

“We’re absolutely seeing a shift toward value” in stock markets, Mr. Kamal said. “European equities are beneficiaries of this, a lot of major companies are value linked.”

Overseas, the pan-continental Stoxx Europe 600 added 0.2%.

In Asia, most major benchmarks finished the day down. China’s Shanghai Composite Index and Hong Kong’s Hang Seng both fell 1.2%. South Korea’s Kospi Index rose 1%, buoyed by the prospect of a new pandemic relief spending package.

Traders work on the floor of the New York Stock Exchange on Monday.


Courtney Crow/Associated Press

Write to Anna Hirtenstein at anna.hirtenstein@wsj.com and Caitlin McCabe at caitlin.mccabe@wsj.com

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