U.S. Stocks Waver After Fed Statement -- 2nd Update

By Joe Wallace and Paul Vigna

U.S. stocks slumped back toward their morning lows, even after the Federal Reserve projected no interest-rate increases through 2022.

The Dow Jones Industrial Average was down 257 points, or 0.9%, as of the 4 p.m. close of trading in New York. It briefly traded higher after the Fed statement, after falling as many as 334 points in the morning. The S&P 500 fell 0.5%. The tech-heavy Nasdaq Composite rose 0.7%.

The Federal Reserve on Wednesday said it was committed to providing more support to the economy in the wake of the coronavirus pandemic. To that end, it projected it wouldn't raise interest rates through 2022, and that it would maintain its recent pace of purchases of Treasury and mortgage securities.

"We are not thinking about raising rates," Chairman Jerome Powell said in a press conference. "We are not even thinking about thinking about raising rates."

The Fed's support has been a key driver of the equities rally. After last week's surprisingly chipper jobs report, there was some questions about how the central bank would calibrate its stimulus programs.

"This rally is simply not born of economic data, or even recovery prospects," said Dwyfor Evans, head of macro strategy for Asia Pacific at State Street Global Markets. "It is really driven by expectations that central banks and governments will be there to back the economic recovery."

In bond markets, the yield on the 10-year U.S. Treasury note ticked down to 0.739% from 0.829% on Tuesday. Yields fall as bond prices rise.

Stocks have surged in an extraordinary rally since their March lows, a rally that this week pushed the Nasdaq Composite to a record high and briefly saw the S&P 500 wipe out its year-to-date losses.

The gains have so far been fueled by hopes for an economic recovery as most U.S. states loosen stay-at-home and lockdown restrictions, which have bolstered recovery predictions and in turn equities. The reopenings, though, won't automatically lead to a recovery, said Joseph Amato, the president of Neuberger Berman Group.

"We would be careful not to misinterpret the speed of the reopenings," he said. What will support the market is the strength of the recovery. If it turns into a long, drawn-out recovery, "then the markets may have gotten ahead of themselves," he said.

A second wave of lockdowns to counter a resurgent novel coronavirus would deal a terrible blow to a global economy already facing a severe contraction, the Organization for Economic Cooperation and Development said Wednesday. The OECD said it expected the global economy to contract by 6% this year if a second wave of infections and containment measures can be avoided.

For now, investors are seemingly more focused on riding the rising tide of equities than they are about the economic picture, said Rupert Thompson, chief investment officer at Kingswood Holdings.

"To the extent this rally continues, it's going to be people jumping in late in the game because they've missed it so far," he said.

The market can ride this wave for another couple of months, he said. At that point, government aid programs may lapse, and there could be another wave of bankruptcies and a second wave of layoffs, to say nothing of a possible second wave of infections, he said. "Only then will the V-shaped recovery story get put under pressure."

Among equities, shares in United Airlines Holdings fell 9.8% after analysts at JPMorgan Chase cut the stock to neutral. Delta Air Lines fell 5.9% and Southwest Airlines dropped 2%. Cruise operators Carnival lost 8.9% and Royal Caribbean Cruises was down 8%.

Shares in such transport and leisure companies, which were punished earlier in the year, have surged in recent weeks amid optimism about the reopening of the U.S. economy from lockdown.

Shares of Uber were down 3.9% after the Journal reported Just Eat Takeaway.com is near a deal to acquire Grubhub, which was in acquisition talks with Uber. Grubhub shares fell 2.3%, Just Eat ADRs were down 9.3%.

Oil prices also rose after the Fed report, despite a weekly report this morning that showed U.S. inventories of crude oil rose to a record-high in data going back to 1982. U.S. crude futures rose 1.7% to $39.60 a barrel.

International stock markets posted tepid gains. The Stoxx Europe 600 fell 0.4%. Japan's Nikkei 225 index closed 0.2% higher, helped by health care and electronics stocks. The equity benchmark in South Korea rose 0.3%, while Hong Kong's Hang Seng Index ended trading almost unchanged.

China's Shanghai Composite fell 0.4% after data showed industrial prices sliding deeper into deflation in May, declining 3.7% from a year earlier. Consumer inflation eased due to softening food prices, slowing to 2.4%. Both figures undershot consensus forecasts from economists polled by The Wall Street Journal.

Write to Joe Wallace at [e-mail] and Paul Vigna at [e-mail]