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U.S. stocks end higher, extending rebound as Fed's Powell testified

By Christine Idzelis and William Watts

Nasdaq Composite posts new record close

U.S. stocks finished higher Tuesday, building on Monday's sharp rebound from last week's losses, as Federal Reserve Chair Jerome Powell reiterated his view that higher inflation will be transitory as the economy slowly works its way out of the pandemic this year.

What are major benchmarks doing?

On Monday, stocks bounced back sharply from the previous week's heavy losses, with the Dow advancing 586.89 points, or 1.8%, while the S&P 500 rose 1.4% and the Nasdaq Composite gained 1.8%.

What drove the market?

The S&P 500 index ended Tuesday near a new closing record, while the Nasdaq Composite reached a new all-time high, led by technology stocks. Netflix (NFLX), Amazon (AMZN), Apple (AAPL) and Microsoft (MSFT) and Facebook (FB) all gained, and even Alphabet (GOOGL)(GOOGL) rose even though the European Commission opened a probe (link)into Google's advertising business.

U.S. stocks advanced as Chair Powell testified before the House select subcommittee on the coronavirus pandemic, marking his first public appearance since last Wednesday when he acknowledged that policy makers had started to discuss the eventual reduction of the Fed's monthly bond purchases.

In responding to questions from Congress, Chair Powell on Tuesday again signaled the central bank would be patient before scaling back its lose monetary policy, saying the Fed had to be "very humble" about its ability to draw a signal out of the economic data given "such an unusual setting of reopening the economy."

"U.S. stocks pushed higher after Fed Chair Powell's testimony calmed financial market worries over runaway inflation triggering a quicker removal of stimulus," said Edward Moya, Senior Market Analyst, The Americas, at OANDA.

See: Fed's Powell stays the course (link)

In prepared testimony (link) released by the subcommittee late Monday, Powell said, "the Fed will do everything we can to support the economy for as long as it takes to complete the recovery." Inflation, meanwhile, remains top of mind for investors.

"Powell reiterated his view that the recent jump in inflation would prove transitory. While such comments seem to have soothed concerns over the Fed's hawkish tilt, the question is for how long?" said Lukman Otunuga, senior research analyst at FXTM, in a note. "Given how markets remain highly sensitive to comments from Fed officials and inflation expectations, the next few days promise to be quite eventful for markets with numerous Fed speakers on the roster."

A key question for investors following the market reaction to last week's Fed moves centers on the fate of the reflation trade -- bets that assets poised to benefit the most from accelerating economic growth and inflation will outperform their peers.

J.J. Kinahan, TD Ameritrade's chief market strategist, in an interview Tuesday that he is expecting a "tug a war" between growth and value stocks to continue as investors keep trying to discern whether inflation may be longer lasting.

The reflation trade found renewed life Monday, after suffering in the wake of last Wednesday's Fed meeting, with value-oriented stocks falling, growth stocks rallying and the yield curve flattening. But the Fed's change in tone is unlikely to stand in the way of continued post-pandemic growth and a further rise in inflation, said Lauren Goodwin, economist and portfolio strategist at New York Life Investments.

"The reflation trade will not develop linearly from here, and investors should expect hiccups. But the Fed's adjusted path is hardly a recession-starter," she said, in a note.

"Higher short-term rates in 2023 and fewer asset purchases in 2022 are unlikely to dramatically shift the ongoing rebound in economic growth," Goodwin wrote. "Instead, this brief unwind will represent an opportunity to build positions in the reflation theme, through cyclical equity and lower duration."

Read: Is the reflation trade over? What stock-market investors need to watch (link)

Investors heard from other Fed officials earlier Tuesday also. Cleveland Fed President Loretta Mester (link) said she didn't want to adjust the central bank's easy monetary policy stance until the labor market made more progress over the summer. San Francisco Fed President Mary Daly also pointed to the fall, (link) saying the economy was getting to the "substantial further progress" benchmark more quickly than she had thought at the start of the year.

The market is digesting "a lot of crosstalk from the Fed governors," said Steve Sosnick, chief strategist at Interactive Brokers, in an interview Tuesday. He pointed to the challenge the Fed faces in making adjustments to its dovish policy. "Investors are addicted to Fed liquidity (link)," Sosnick said. "I think the Fed realizes that unwinding their accommodation will take a lot more finesse than it did to implement it."

Meanwhile, another busy week of initial public offerings on U.S. exchanges is under way this week, with 17 deals on tap (link), including at least two expected to raise more than $1 billion.

In U.S. economic data, May existing-home sales fell 0.9% to a seasonally adjusted annual rate of 5.8 million (link), the National Association of Realtors reported. Compared with May 2020, home sales were up nearly 45%, though the year-over-year comparisons are skewed by the onset of the COVID-19 pandemic last year. Economists polled by MarketWatch had projected existing-home sales to come in at 5.73 million.

On the infrastructure front, President Joe Biden is "encouraged by the ongoing talks (link) and discussions that are continuing with Democrats and Republicans," White House press secretary Jen Psaki told reporters Tuesday. "There's a budget reconciliation process that's just getting underway, which we expect to be a vehicle to move a number of the president's bold ideas forward."

Which companies were in focus?

How did other markets fare?

-Christine Idzelis; 415-439-6400;


(END) Dow Jones Newswires

06-22-21 1647ET

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