By Kate Gibson, MarketWatch
NEW YORK (MarketWatch) -- U.S. stocks ended lower Wednesday
after inflationary concerns voiced in the bond market helped put a
halt to the S&P 500 Index's six straight sessions of gains.
Rising interest rates are "beginning to take the air out of the
equity momentum," said Peter Boockvar, equity strategist at Miller
Tabak.
He cautioned, however, that the exact impact on stocks from the
rise in inflation expectations is difficult to gauge, given other
factors at work in the market -- including a quarterly rebalancing
of the S&P 500 and upcoming stock options' expiration.
The Dow Jones Industrial Average (DJI) ended off 19.07 points,
or 0.2%, at 11,457.47 after bouncing between small gains and losses
for most of the session. Of the 30 components, 21 fell, led by
Alcoa Inc. (AA) and J.P. Morgan Chase & Co. (JPM).
Erasing mild gains, the S&P 500 Index (SPX) was off 6.36
points, or 0.5%, at 1,235.23, with rate-sensitive utilities and
financials sectors down the most and consumer staples the strongest
of its 10 sectors.
Yields on the 10-year note (UST10Y) gained 5 basis points to
3.53% as prices fell, giving up earlier gains midday. The rise in
yields helped the dollar head higher.
Late Wednesday, the Investment Company Institute reported
taxable bond mutual funds experienced net outflows for the week
ended Dec. 8, the first week of negative flows for the category
since December 2008.
"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," said Bruce McCain, chief market strategist at Key Private
Bank, referring to exits from the fixed-income market by investors
worried about the long-term prospect of rising inflation.
The Nasdaq Composite Index (RIXF) declined 10.50 points, or
0.4%, to 2,617.22.
For every share that gained, nearly two fell on the New York
Stock Exchange, where volume topped 1.1 billion.
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.
The U.S. government Wednesday reported 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.
In corporate news, 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.