Why Dow ends higher after dramatic selloff Stock Market Just Staged

On a wild day on Wall Street, stocks ended the day higher with a stunning turnaround just before the closing bell. Stocks began the day with a dramatic selloff.

US stocks opened in the red as investors worried about the Federal Reserve’s plans to hike interest rates, tensions in Ukraine, earnings season and — of course — inflation.

At the low point of the session, the market was on track for its worst day since October 2020, with the Dow down more than 1,000 points.

But with just minutes to go in the trading session, the major indexes reversed course and turned green. The Dow finished 0.3%, or 99 points, higher.

What on earth happened to turn things around? The selloff may have just gone a bit too far.

“Investors may have gotten a bit too pessimistic about the growth outlook,” said Oanda senior market analyst Edward Moya in the late afternoon.

The wild swings of the day were also visible in the CBOE Volatility Index (VIX), or Vix, which soared during the day but ended the session “only” 3.2% higher.

Fears of tighter monetary policy from the Federal Reserve, a military conflict in Russia, and simply being on the wrong side of the trade, had stoked panic in the stock market early Monday. Then, investors bought the dip.

The S&P 500 rose 0.3% after falling nearly 4% at one point during the day. The index is now down 8% from its all-time high set on Jan. 3, but avoided closing in correction territory, the term for a drop of 10% from a high.

Panic was the name of the game, as the drops sent Wall Street’s “fear gauge,” the Cboe Volatility Index, up as high as 38.94, the highest since October 2020, before it pulled back to 29.90.

Not to be left out, the Dow Jones Industrial Average rose 101 points, or 0.3%, erasing earlier declines of more than 1,000 points. It’s down some 7% from its all-time high set on Jan. 4, while the Nasdaq Composite gained 0.6%. The tech-heavy index fell into a correction last week and is now down more than 14% from its recent high.

The biggest gain of the day was in the Russell 2000 index of small-cap stocks, which briefly entered bear market territory Monday before posting a gain of 2% Monday.

If anything was responsible for the drop, it’s the sense that the Federal Reserve, which will release its interest-rate decision on Wednesday, is ready to slam the brakes on growth in the to tame inflation. Traders expect four interest rates hikes in 2022, which the Fed would implement to curb inflation, a move that could choke off economic growth. Plus, bond yields have risen this year, partially a response to the Fed ending its bond-buying program. That makes future profits less valuable, causing valuations to decline, especially for tech and growth stocks.

The primary damage is a compression of valuing the earnings, in the face of potentially higher interest rates as central banks tighten monetary support to address inflation,” wrote Louis Navellier, founder of Navellier & Associates.

That brings the Fed into focus this week. The central bank will make a decision on interest rates this Wednesday. Although markets don’t expect a rate hike until March, investors will be watching the bank’s statement to see if a March hike is now more or less likely—and whether the Fed will slam on the brakes to slow inflation.

That seems unlikely, says Mizuho economist Alex Pelle. He notes that much of the economic data since the last FOMC meeting have disappointed. Its been even worse recently, with the Citi Economic Index dropping from -2.9tp -22.1 since the Fed entered its quiet period.

” Overall, we expect markets will be able to breathe a sigh of relief following Powell’s postmeeting press conference,” Pelle writes. “In our view, the risk of a hawkish surprise—one that is not already discounted by markets—is low.”

Adding to the concerns: the possibility of tensions on the border of Russia and Ukraine leading to military aggression. The North Atlantic Treaty Organization is sending ships and jet fighters to Eastern Europe in response to Russia’s military buildup near Ukraine. The European Union also plans to provide loans and grants totaling more than $1 billion to Ukraine.

“Investors appear to be concerned about the timing and pace of monetary policy tightening, the persistence of inflation, and potential profit margin pressure,” writes Keith Lerner, chief market strategist at Truist Advisory Services.“And now we can add building geopolitical tensions surrounding Russia and Ukraine.”

Still, if Ukraine and Russia were really an issue, In the commodity space, crude prices were falling. Futures contracts for West Texas Intermediate fell 1.3% to under $84 a barrel.

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