Stock Market Volatility Fueled by Positive, Negative Effects from Rising Rates

The major U.S. stock indexes closed higher on Wednesday during a volatile trading session. Investor turmoil was fueled by the conflicting effects of rising interest rates and strong economic data. On one hand, investors like the positive vibe emitted by the robust strength of the economy. On the other hand, rising interest rates could eventually slow down the economy.

On Wednesday, the benchmark S&P 500 Index settled at 2925.51, up 2.08 or +0.07%. The blue chip Dow Jones Industrial Average finished at 26828.39, up 54.45 or +0.20% and the tech-based NASDAQ Composite ended the session at 8026.36, up 26.81 or +0.34%.

The two-side volatility was best seen in the Dow which rose 250 points to a new all-time high early in the session, but ended up settling only 54 points higher. The S&P 500 also soared early, however, it struggled late to settle nearly unchanged. The NASDAQ also treaded water late in the day.

Stocks most sensitive to rising interest rates were the most volatile. These included utilities and consumer product companies paying large dividends. Bank stocks, however, were big winners because they tend to earn more money during a rising interest rate environment. J.P. Morgan Chase added about 1 percent on the day. Citigroup was also up nearly 1 percent, while Bank of America gained 1.4 percent.

U.S. Treasury Markets

Solid U.S. private sector payrolls data and an extremely strong services report help drive Treasury yields to multi-year highs. The benchmark 10-year note yield traded near 3.14 percent, hitting its highest level since 2011. The 30-year bond yield, meanwhile, reached its highest level since October 2014.

In economic news, ADP reported that private payrolls increased by 230,000 in September, the most since February. This beat the 185,000 forecast and probably sets the table for a strong U.S. Payrolls number on Friday.

The ISM non-manufacturing index reached its highest level on record, according to data released Wednesday. The services report came in at 61.6, well-above the 58.0 forecast.

Fed Chair Powell Speaks

The Federal Reserve will continue to raise interest rates at a gradual pace in order to extend the economic recovery while keeping inflation in check, Chairman Jerome Powell said.

“The practical way we can navigate between moving too fast and moving too slow is to move gradually,” Powell said Wednesday at an event in Washington hosted by The Atlantic magazine and the Aspen Institute. He said the Fed may move interest rates above the so-called neutral level that neither stokes nor slows growth.

“Interest rates are still accommodative, but we’re gradually moving to a place where they’ll be neutral – not that they’ll be restraining the economy,” he said. “We may go past neutral. But we’re a long way from neutral at this point, probably.”

Powell also reiterated his upbeat assessment of the economy a day after drawing attention to the “extraordinary times” the U.S. is experiencing with low, steady inflation, coupled with very low unemployment.

Finally, Powell finished his speech by saying, the U.S. is experiencing “a remarkably positive set of economic circumstances, and we’re working hard to try to sustain the expansion and keep unemployment low and keep inflation right on target.” He then added, “There’s really no reason to think that this cycle can’t continue for quite some time.”

FOMC Loretta Mester Chimes In

Cleveland Fed chief Loretta Mester said she supported a gradual pace of hiking, though the speed will depend on inflation and employment levels. “If we end up having inflation move high up” or if it goes too much above target, “then we need to move policy faster,” she said.