Stocks slumped in afternoon trading on Monday, reversing an earlier rally that came after President Joe Biden announced he would renominate Jerome Powell to continue to lead the Federal Reserve over Fed Governor Lael Brainard.
The Dow Jones Industrial Average rose just 17 points, down from a gain of more than 300 points at session highs. The S&P 500 and Nasdaq Composite fell 0.3% and 1.3% respectively after hitting intraday record highs earlier in the session.
Powell, a former private equity executive, slashed interest rates to near zero and implemented emergency asset purchases in March 2020 to help backstop the market during the first wave of the Covid-19 pandemic, helping the financial system to remain operational during a sharp slowdown in economic activity. He also lead a landmark re-evaluation of the Fed’s inflation targeting framework during the Covid crisis.
The move assuaged investors worried about switching central bank chiefs while the country’s economy is trying to emerge from the Covid pandemic and battle inflation levels not seen in three decades.
“It appears markets are reacting positively to the continuity signal. Continuity will be key during this potentially tricky phase of the recovery where inflation is elevated and sticky, demand growth is strong but cooling and capital and labor supply is gradually rebounding,” said Greg Daco, chief U.S. economist at Oxford Economics.
Powell’s renomination comes as inflation has exceeded expectations in recent months, leading the Fed to walk back its predictions that the rise in prices that accompanied the reopening of the economy would be “transitory.” Some critics have said the Fed is waiting too long to tighten monetary policy.
The central bank began slowing its asset purchases in November, its first major scaling back of its emergency programs from 2020, and indicated that it could accelerate that process early next year.
Bank stocks and Treasury yields moved higher after the White House announced the Fed decision. Shares of JPMorgan rose 2.7% while Morgan Stanley rose more than 3%. The move higher in rates appeared to take a bite out of some tech stocks, whose future earnings are less attractive to investors when yields are higher.
Brainard, who was seen as Powell’s main competition and was favored by progressives in Washington for her stances on bank regulation and climate change, is being nominated for a vice chair position at the central bank but not to the top regulatory role many had expected.
“The fact that Brainard wasn’t nominated for the Vice Chair for supervision role may also be a driving factor behind the positive markets momentum as there were some concerns that Brainard would push harder to tighten banking regulation in that role,” Daco said.
Powell, a Republican, was first nominated to the Fed Board of Governors a decade ago by President Barack Obama and ascended to the top job under President Donald Trump. His ties to the Republican Party and previous confirmation for the Fed’s top job were seen by some as reasons that he could be easier to confirm in a closely divided Senate than another candidate.
“I think this is a decent 1-2 combination,” UBS director of floor operations Art Cashin said on “Squawk on the Street.” “I think that’s what they wanted to get, no disruption. I think the market reaction you’re seeing is the market is happy with no disruption.”
Moderna shares continued their upward momentum, rising 4.8% in early trading after the FDA last week cleared the company’s booster shot for all U.S. adults.
On the downside, Activision Blizzard dropped 2.1% following reports that CEO Bobby Kotick said he would consider resigning if he can’t fix the company’s culture. That news came following reports that Kotick was aware of sexual misconduct within the organization. The Nasdaq Composite was hurt by declines in Netflix and Etsy.
Covid news also weighed on market sentiment, as German Chancellor Angela Merkel warned that the country was seeing a spike of the virus.
Stocks have a track record of posting gains in Thanksgiving week, which will potentially set the stage for a year-end Santa rally.
Since 1950, the last five trading days of November have been traditionally positive, according to Sam Stovall, chief investment strategist at CFRA. Meanwhile, there’s a two-thirds likelihood the market is up on the day before Thanksgiving Day and a 57% chance the day after the holiday, the strategist said.
U.S. markets will be closed Thursday on Thanksgiving Day. The stock market closes early at 1 p.m. ET on Friday.
–CNBC’s Patti Domm contributed reporting.