Dow surges more than 500 points after Federal Reserve chair hints he will act if trade war snowballs

A trader on the floor of the New York Stock Exchange last week. (Richard Drew/AP)

June 4

Wall Street posted one of its best days of the year Tuesday, with all three major U.S. indexes closing up at least 2 percent after Fed Chair Jerome H. Powell signaled the central bank would act if President Trump’s multi-front trade war mushrooms.

The Dow Jones industrial average bounced 512 points, or 2 percent, to close at 25,332. The Standard & Poor’s 500-stock index closed up nearly 59 points, or 2.14 percent, at 2,803 on Powell’s comments and on reports that China and Mexico had expressed desires to settle trade issues. The Nasdaq composite closed at 7,527, a 194-point rebound — or 2.65 percent — from Monday.

“We are closely monitoring the implications of these developments for the U.S. economic outlook, and as always, we will act as appropriate to sustain the expansion,” Powell said Tuesday during a speech in Chicago.

The late-afternoon rally also came as Republican senators warned the Trump administration that they were prepared to block the president’s plan to impose tariffs on Mexican imports in an effort to force Mexico to do more to stop Central American migrants from reaching the U.S. border. Markets had plummeted last week in the wake of Trump’s tariff threat.

Chris Rupkey of MUFG said investors had overreacted in recent weeks, with May ending as the first down month for stocks in 2019.

“We just discounted the end of the world, and now we are coming back,” Rupkey said Tuesday. “It looks like the news isn’t quite as bad. And Powell said the Fed stands ready to support the expansion. Everything looks much better today.”

The technology-heavy Nasdaq surged Tuesday after falling into correction territory Monday as Washington politicians on both sides of the aisle began calling for the investigation and regulation of the FAANG companies: Facebook, Amazon, Apple, Netflix and Google parent Alphabet.

All five FAANG companies went positive as investors took a deep breath and recognized that technology, with a 10 percent decline in a month, was on sale. The FAANGs have made outsize contributions to the current bull market. Apple shares, which were among the hardest hit on Monday, rose 3.66 percent. Media services Netflix jumped nearly 5 percent.

All but one of the 30 Dow blue-chips were up Tuesday, with Nike the biggest gainer at 4.69 percent. Verizon had the only down day on the Dow.

“The sell-off yesterday was overdone, especially in tech companies,” said Ed Yardeni, president of Yardeni Research. “Investors are recognizing these stocks just got a lot cheaper, so they jumped in. It looks like Washington is going on a fishing expedition with the FAANGs, even though there’s no obviously screaming problem for an antitrust case.”

Nine of 11 market sectors were positive, with technology stocks leading the way. The havens of real estate and utilities were in the red as investors reacquired their appetite for riskier investments after Monday’s retreat.

The markets had been signaling a rebound overnight after the German Dax led European shares upward. Asian markets were down a bit. The London FTSE 100, French CAC 40 and Pan-European Stoxx 600 all closed with gains.

“It’s not only the Fed stuff,” said Jeffrey Saut of Capital Wealth Planning. “You had the markets down for six straight weeks. There’s only been seven straight seven-week declines since 1900 and one eight-week down-slide. Technicals showed extreme fear. Then overnight was the news that China and Mexico look like they are amenable to certain concessions. Then the Fed today.”

U.S. stocks had been slumping for a month after Trump said he would place a 25 percent tariff on Chinese goods entering the United States starting in June. The S&P finished May down 5 percent, while the Dow and the Nasdaq dropped 4.6 and 8 percent respectively during the month.

On Thursday the president surprised the world when he tweeted that Mexican goods entering the United States, from raspberries to crucial automotive parts, would be subject to a 5 percent tariff. The tax would rise monthly in five-percentage-point increments, topping out at 25 percent in October.

By Monday’s market close, all three U.S. indexes were well off their all-time highs and Wall Street was shaking with worry over a possible recession or worse. The stock market declines occurred despite a strong U.S. economy, bolstered by record low unemployment, robust corporate earnings, low interest rates, low inflation and increasing wage gains.

Market analysts on Monday were expecting the Fed to cut interest rates at least twice through the end of this year and possibly a third time by early 2020.

Powell wasn’t the only Fed voice soothing markets. San Francisco Fed President Mary Daly, speaking Monday in Singapore, said the bank had reason to be “patient” on interest rates because of Trump’s recent threat to raise tariffs on Mexican goods.

St. Louis Fed President James Bullard said Monday that a rate cut may be “warranted soon.”

Stocks are still way up for the year, despite taking a beating during May. The Dow has advanced more than 8 percent in 2019. The S&P has gained 11 percent, and the Nasdaq was up nearly 13 percent on the year as of midday Tuesday.

Rupkey said there is no need for a rate cut, given the strong economy.

“We view rate cuts now as one of the biggest mistakes that will ever be made by a Fed chairman,” Rupkey said in a note Tuesday. “It could usher in another lost decade of zero interest rates with severe repercussions for safe long-term market returns right at the time when a wave of 10,000 baby boomers a day are retiring.”