U.S. stocks slipped on Tuesday, with riskier equities hit hardest after the Federal Reserve, in an unusual statement, singled out the valuation of social media and biotechnology shares as “substantially stretched.”
Bond prices were flat but gold was lower as Fed Chair Janet Yellen’s comments suggested interest rate hikes could come sooner than anticipated if the labor market continued to improve. Separately, oil prices tumbled amid rising supply from Libya.
Wall Street equities were supported by bank stocks like JPMorgan Chase & Co., which outperformed following strong results.
The Fed’s semi-annual monetary policy report, which accompanied Yellen’s testimony to the Senate Banking Committee, noted that overall U.S. stock valuations were “generally at levels not far above their historical averages,” even as it singled out riskier sectors of the market.
Social media and biotechnology shares slumped following the release of the report, with the Nasdaq Biotech Index down 1.7 per cent on the day.
“These are the subindustries that have caused a lot of long-time stock watchers to scratch their heads. These companies have relative few earnings, especially in the biotech area,” said Kim Forrest, senior equity research analyst, Fort Pitt Capital Group in Pittsburgh.
Overall, Yellen said the U.S. economic recovery was incomplete and she defended the central bank’s accommodative monetary policies. She said some signs of a pickup in inflation were not enough for the Fed to accelerate its plans for raising interest rates, but improved labor markets might accelerate the process.
“If the labor market continues to improve more quickly than anticipated by the Committee, resulting in faster convergence toward our dual objectives, then increases in the federal funds rate target likely would occur sooner and be more rapid than currently envisioned,” she said.
Bond yields initially rose after her comments, but the U.S. 10-year Treasury note subsequently turned positive, rising 1/32 of a point in price to yield 2.5431 per cent.
The Dow Jones industrial average was down 4.82 points, or 0.03 per cent, at 17,050.60. The Standard & Poor’s 500 Index was down 3.51 points, or 0.18 per cent, at 1,973.59. The Nasdaq Composite Index was down 21.34 points, or 0.48 per cent, at 4,419.08.
The MSCI World Index fell 0.3 per cent while European shares ended down 0.4 per cent, pressured by a drop in Germany’s ZEW index of economic sentiment. The MSCI International ACWI Price Index fell 0.2 per cent.
While Yellen’s comments were the day’s primary driver, financial shares helped major indexes recover early losses.
Both JPMorgan and Goldman Sachs Group Inc. rose after reporting results, with JPMorgan up 3.9 per cent to $58.47 as the biggest gainer on both the Dow and S&P. However, another Dow component, Johnson & Johnson, fell 2 per cent to $103.27 after its results.
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