Wall Street Hits the Brakes After Strong, Weekslong Rally

Wall Street hit the brakes Tuesday, a day after its remarkable, weekslong rally brought the S&P 500 back to positive for the year and the Nasdaq to a record high.

The S&P 500 was down 0.9% in midday trading, after earlier being down as much as 1.2%. The Dow Jones Industrial Average was down 283 points, or 1%, to 27,281, and the Nasdaq composite was up 0.1%.

Skeptics have been saying for weeks that Wall Street’s huge rally, which reached 44.5% between late March and Monday, may have been overdone. The economy has given glimmers of hope that the recession could end relatively quickly as governments lift their lockdown orders, but the stock market has been soaring much more quickly than the economy and corporate profits are expected to.

“We’re seeing a little bit of a pause and a little bit of a reversal,” said Bill Northey, senior investment director at U.S. Bank Wealth Management. “Some of that is an appropriate reconciliation with the pace for the restart.”

In another sign of increased caution, the yield on the 10-year Treasury yield fell to 0.81% from 0.88% late Monday. It tends to move with investors’ expectations of the economy and inflation, though it’s still well above the 0.64% level where it started last week.

European stock markets were also lower. Germany’s DAX lost 1.4% after the country reported that its exports fell by a quarter in April. France’s CAC 40 slid 1.5%, and the FTSE 100 in London dropped 2.1%.

Asian markets were mixed. Japan’s Nikkei 225 slipped 0.4% after the government reported that wages fell in April as the country widened precautions to fight the coronavirus pandemic, which caused some businesses to close or limit their operations. But the Hang Seng in Hong Kong rose 1.1% and South Korea’s Kospi added 0.2%.

Wall Street has been generally rising since late March, at first on relief following emergency rescues by the Federal Reserve and Congress. More recently, investors have begun piling into companies that would benefit most from a reopening economy that’s growing again.

Banks, airlines, energy companies and others whose profits need the economy to get closer to normal have been leading the way in recent weeks. They got a big boost on Friday when the government said that employers surprisingly added jobs to their payrolls last month, a sign that the economy could pull out of the recession that began in February relatively quickly.

But such companies went into reverse on Tuesday. American Airlines and Alaska Air Group both fell more than 9% for some of the sharpest losses in the S&P 500, a day after they were near the top of the leaderboard.

Stocks in the energy, financial and industrial sectors fell more than the rest of the market, also mirroring their performance from a day before. Technology and communication services companies rose.

Smaller stocks also pulled back following a furious run. The Russell 2000 index of small-cap stocks fell 2.1%, after a 10.2% rally in a little more than a week.

Skeptics of the rally have been saying that many risks still lurk ahead on the long road to a full recovery. Chief among them is the possibility of a second wave of coronavirus infections, which could lead states across the country and nations around the world to tighten up on lockdown measures that could again choke the economy. Plus, one month of improving jobs data does not necessarily mean a trend.

The next big milestone for markets is coming Wednesday, when the Federal Reserve announces its decision on monetary policy following a two-day meeting. The Fed’s promise of immense, unprecedented amounts of aid helped stocks begin their rally, and investors want to see what their reaction will be to the recent upturn in jobs numbers.