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By Ben Levisohn

A day that began with stocks falling under the weight of recession concerns looks ready to end with much of the market at least flat on the day.

While the Dow Jones Industrial Average DJIA –0.42% fell 0.4% Tuesday, the S&P 500 SPX +0.16% ticked up 0.2%, and the Nasdaq Composite gained about 1.8%. Even the small-company Russell 2000 finished higher on the day. The Dow was down more than 700 points earlier in the day.

It was a strange day and a strange mix of returns, one that might make a little bit of sense once the market’s dual worries of inflation and recession are taken into account. While inflation is still a big worry, investors are also concerned about the strength of economic growth.

That is reflected in the U.S. Treasury market, where the 10-year yield has fallen 0.088 percentage point to 2.818%.

“It was not long ago that inflationary angst was the driver of the move in US rates,” writes BMO Capital Markets’ Ian Lyngen. “[That] has given way to the specter of a recession and the move lower in yields reflects precisely the prospect for a slowdown domestically, and globally.”

The move lower in yields has been good news for the Nasdaq and the growth stocks that reside there, no matter the cause. Remember, when the Fed first started raising rates, tech stocks Nvidia (NVDA), as well as tech-adjacent companies like Meta Platforms (META), Netflix (NFLX), and Amazon.com (AMZN), took it on the chin as the market’s first response was to trim valuations, particularly very high valuations.

Yields are heading lower now, and that is making those same stocks, which have dropped 42%, 50%, 69%, and 32%, respectively, look like bargains after their big drops. On Tuesday, Nvidia gained 3%, Meta climbed 5.1%, Netflix rose 3.3%, and Amazon advanced 3.6%.

Tech might also have gotten a boost from reports that there was a “constructive” call between U.S. Treasury Secretary Janet Yellen and Chinese Vice-Premier Liu, with the two agreeing on better coordination on macro policies.

Expectations were also rising that the U.S. would pause tariffs on some Chinese imports, following a Wall Street Journal report detailing plans to lift tariffs for some consumer goods and launch a broad framework for importers to request tariff waivers, something that is thought to be good news for tech stocks.

Together, they trumped reports of a lockdown in a major Chinese city making the rounds Tuesday.

Economically sensitive stocks, which had held up better, are now the source of worry if only because they’re so dependent on economic growth for their profits. But now that investors are worried about a recession, they’re having a tougher time of it.

  Caterpillar (CAT), for instance, dropped 2.5% today, while Chevron (CVX), slipped 2.6% as oil dropped under $100 (yes, blame recession fears again).

A wave of economic data in the week ahead—including the U.S. nonfarm payrolls report on Friday—as well as minutes from the Federal Reserve’s June meeting, will be closely watched as investors focus on whether tighter monetary policy will be needed.

And the market is right to be worried about a slowdown. The Atlanta Fed’s GDPNow tool, for instance, is pointing to a 2.1% decline in U.S. second-quarter GDP, which would be the second quarter in a row and meet the technical definition for a recession.

Overnight, meanwhile, the yield on the two-year Treasury rose as high as 2.95% and briefly surpassed that of the 10-year. That is known as a yield curve inversion, and is thought to be a prelude to a recession, though the timing is uncertain.

The wild card may sit in Europe. It isn’t just that the euro is weak—it has fallen 1.5% to 1.0265 on Tuesday—but the message it is sending.

Europe has experienced extreme energy-price inflation following the Russian invasion of Ukraine, especially linked to natural gas. Concerns around widening spreads between bond yields among European Union members is also adding to selling pressure on the euro.

“The euro is in dire straits now as the central bank is so far away from its objective and now has an even bigger problem in terms of fragmentation,” said Neil Wilson, an analyst at broker Markets.com. “Unless the [European Central Bank] gets its act together it could be at parity soon. These are important levels and it should be noted that USD is bid across the board.”

The U.S. Dollar Index—which measures the greenback against a basket of six peers—surged 1.3% to 106.51, its highest level in 20 years and up from 96 at the beginning of 2022. That is not necessarily good news for stock market investors. A strong dollar means multinational companies—of which the U.S. has many—see their international sales worth less at home.

It’s just one more sign that the market has bigger problems than investors give it credit for—even if stocks managed to avoid a major selloff for one more day.

Original Article – Barrons

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