By Kate Gibson, MarketWatch
NEW YORK (MarketWatch) -- U.S. stocks were mostly lower
Wednesday as inflationary concerns voiced in the bond market helped
Wall Street relinquish a run that had the S&P 500 Index up for
six consecutive sessions.
Rising interest rates are "beginning to take the air out of the
equity momentum," said Peter Boockvar, equity strategist at Miller
Tabak.
The exact impact on equities from the rise in inflation
expectations is difficult to gauge, Boockvar said, given it's
"expiration week and S&P quarterly rebalancing and two weeks
more of end-of-year window dressing."
Up and down in a limited range, the Dow Jones Industrial Average
(DJI) was up 9.5 points at 11,485.97, with 18 of its 30 components
in the red, led by J.P. Morgan Chase & Co. (JPM) , its shares
falling 1.3%.
Erasing mild gains, the S&P 500 Index (SPX) was off 4.12
points, or 0.3%, at 1,237.47 with rate-sensitive telecom and
utilities down the most and consumer staples the strongest of its
10 sectors.
"Money has to go somewhere, and part of the strength we're
seeing is money leaking back into the riskier class of equities,"
said Bruce McCain, chief market strategist at Key Private Bank of
Wall Street's recent run, which on Tuesday had the S&P 500 up
for a sixth consecutive session.
"Cattle will move in the direction they are forced to move in,
and people are being prodded back into equities. It's not a mad
rush," McCain added, referring to exits from the fixed-income
market by investors worried about the long-term prospect of rising
inflation.
The Nasdaq Composite (RIXF) declined 9.78 points, or 0.4%, to
2,617.94.
For every share that gained, nearly two fell on the New York
Stock Exchange, where volume topped 680 million at 3:25 p.m.
Eastern.
On Tuesday, the Dow industrials closed at their highest level of
the year, with 10-year Treasury note yields (UST10Y) , used in
determining consumer loans, surging to seven-month highs.
On Wednesday, inflation expectations expressed in the 10-year
Treasury inflation-protected securities, or TIPS, spiked by 10
basis points to 2.36%, "the highest since May 3 and the biggest
one-day move since September," noted Boockvar, the Miller Tabak
strategist.
"The rise in interest rates has been a mix of expectations of
better growth but certainly also of higher inflation and, right now
un-quantifiable, likely concerns over debts and deficits," Boockvar
said.
Fed fight
The Federal Reserve on Tuesday afternoon reiterated its plan to
buy $600 billion in U.S. Treasury notes while leaving its target
for the federal funds rate covering overnight loans between banks
at nearly zero.
"For the first time in a number of months, people are beginning
to seriously question whether inflation is as benign as the Federal
Reserve would like us to believe, and some are losing faith in the
Fed's ability to be objective," said McCain.
Economic data on Wednesday had the government reporting U.S.
factory output climbed for a fifth month in a row, while consumer
prices rose 0.1% in November.
"Statistically, the numbers are benign," said McCain of the
slight rise in consumer prices. Yet people are struggling in
weighing the declining value of their homes against all the costs
that are rising, said McCain, citing creeping price rises in energy
and agricultural goods. "At a minimum it is putting a squeeze on
business profitability."
The Fed is looking to spur economic growth that will lead to
higher employment, but "the only beneficial effect their action can
have in some senses is to keep rates low or drive them lower, so if
every action they take raises rates, they may be getting themselves
between a rock and a hard place," said the analyst.
"We'll have to see who blinks first, the Fed or the bond
market," said McCain of bond investors' concerns that the massive
Fed buying will in time dent bonds, leading them to demand a higher
rate of return.
Swiss pharmaceutical company Novartis AG (NVS) said it reached a
deal with minority shareholders of Alcon Inc. (ACL) to finish its
$51 billion takeover of the eye-products company.