By Yuri Kageyama
Asian shares rose on Tuesday, reversing broad overnight gains on Wall Street, while trading in China and most other regional markets were closed for the Lunar New Year holiday.
Japan’s Nikkei 225 index rose 0.5% in morning trading to 27139.89. Australia’s S&P/ASX 200 rose 0.4% to 6996.80.
Wall Street ended a turbulent January wracked with fears that raising interest rates would make everything in the markets more difficult. Stocks closed higher but posted their worst monthly loss since the early days of the pandemic.
Investors expect the Federal Reserve to start raising interest rates in March to fight inflation. Extremely low rates and other incentives helped the markets recover from the initial shock of the coronavirus pandemic, then supported the impressive gains.
The S&P 500 returned from an early decline to close 1.9% higher at 4515.55. However, the benchmark index fell 5.3% in January, its worst month since its 12.5% drop in March 2020, when it fell after the pandemic suddenly shut down the global economy.
The Dow Jones Industrial Average rose 1.2% to 35,131.86. The Nasdaq climbed 3.4% to 14,239.88. Both also closed in the red for January, with the Dow losing 3.3% and the Nasdaq losing 9%.
The Federal Reserve is about to start withdrawing the massive stimulus it is pumping into the economy and markets.
But uncertainty about how aggressively and how quickly the Fed will act has helped create sharp volatility on Wall Street.
“There are regular buying going on at the end of a really bad month like January, and that has definitely happened over the past day or two,” said Scott Lander, chief investment officer at Horizon Investments.
The biggest losses in the month centered on parts of the stock market seen as the most expensive. Much of the focus has been on high-growth technology stocks, which have been absolute stars of the pandemic amid expectations that they can grow regardless of the economy.
Shares of technology companies in the S&P 500 rose 2.7% on Monday but the sector ended the month down 6.9%. The monthly decline was much deeper for technology stocks like chip maker Nvidia, which jumped 7.2% on Monday, but posted a 16.7% slide for January.
The stock market tends to struggle to adjust to higher rates. When bonds pay more interest, investors don’t feel the need to reach for stocks and other riskier investments in search of returns. This time around, the Fed is also turning off what is colloquially known as the “money printer” it uses to buy bonds to keep long-term interest rates low, likely removing some of those extra dollars revolving around the economy.
The market may have a harder time than usual with this rate hike campaign, because the Federal Reserve will act when economic growth and corporate earnings slow, say strategists at Morgan Stanley.
They cited what they see as worrying signs in the data about US manufacturing, among other factors.
“We remain rallies sellers and view the S&P 500 fair value remains tactically closer to 4,000,” strategists led by Michael Wilson wrote in a report.
Others on Wall Street are not as pessimistic. This is due in large part to broad expectations that corporate earnings will continue to grow, because stock prices tend to track corporate earnings over the long term. For the full year of 2022, analysts expect S&P 500 earnings to rise 9.5%, according to FactSet.
“It should now be clear that the strong pivot in monetary policy will make this year very different from last,” Solita Marcelli, chief investment officer at UBS Global Wealth Management, Americas, wrote in a recent note. “However, we believe that investors should not lose sight of the fact that the economy remains strong, which should limit the downside from current levels.”
The yield on the 10-year Treasury rose to 1.78% from 1.77% on Friday. The two-year yield, which moves more based on expectations about what the Fed will do with short-term rates, rose to 1.18% from 1.15%.
The Fed appears to have a license to act aggressively, with inflation at its highest level in nearly 40 years and the labor market looking strong.
In energy trading, benchmark US crude added 20 cents to $88.35 a barrel in electronic trading on the New York Mercantile Exchange. It rose $1.33 to $88.15 a barrel on Monday. Brent crude, the international benchmark, rose 22 cents to $89.48 a barrel.
In currency trading, the US dollar fell to 115.08 Japanese yen from 115.13 yen. The euro traded at $1.1233, down slightly from $1.1236.
AP Business Business Writers Stan Choi and Alex Vega contributed.