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NEW YORK, Feb 27 (Reuters) – US stocks eked out a slight gain on Monday as investors engaged in some bargain hunting after last week’s losses, the biggest percentage declines of 2023 for Wall Street’s main benchmarks, as jitters persisted about coming interest rate hikes to tame stubbornly high inflation.

All three main stock indexes climbed more than 1% shortly after the opening bell, in part due to an easing in Treasury yields, and all three closed well off their session highs.

Stocks steadily gave up gains throughout the session as US Treasury yields moved off the day’s lows.

“On the heels of the worst week of the year, the first three-week losing streak for the S&P since December, a little green is a welcome change but again the reality is market participants are trying to square the circle with exactly how long the Fed will leave rates high and is a 50 basis point hike really on the table at the next meeting,” said Ryan Detrick, chief market strategist at Carson Group in Omaha, Nebraska.

“It’s led to a good deal of uncertainty, and we have seen that when there is uncertainty there can be selling and volatility.”

The Dow Jones Industrial Average rose 72.17 points, or 0.22%, to 32,889.09, the S&P 500 gained 12.2 points, or 0.31%, to 3,982.24 and the Nasdaq Composite added 72.04 points, or 0.63%, to 11,466.98.

Last week, the Dow Industrials fell by the biggest weekly percentage since September, and the S&P 500 and Nasdaq each had their biggest weekly percentage fall since December as economic data and comments from US Federal Reserve officials heightened expectations the central bank will become more aggressive in raising interest rates.

Economists at UK-based banks Barclays and NatWest believe the Fed could ramp up the pace of its interest-rate rises in March with a half-point hike. Morgan Stanley said it no longer sees a cut by the Fed this year and expects a slower pace of 25 basis points when the central bank does begin lowering rates.

Fed funds futures show traders are pricing in a third 25 bps hikes this year and see rates peaking at 5.4% by September.

Fed Governor Philip Jefferson said he had “no illusion” inflation would quickly fall back to target and be committed to keeping the restrictive monetary policy in place for as long as needed.

Data showed new orders for key US-made capital goods increased more than expected in January while shipments of core goods rebounded, suggesting that business spending on equipment picked up.

Easing yields helped growth stocks rebound 0.63% while Tesla (TSLA) jumped 5.46% after the electric automaker said its plant in Brandenburg near Berlin was producing 4,000 cars a week, three weeks ahead of schedule according to a recent production plan reviewed by Reuters.

Seagen Inc (SGEN) surged 10.40% after the Wall Street Journal reported that Pfizer (PFE) was in early talks to acquire the biotech firm. Pfizer’s shares dipped 2.32%.

US railroad operator Union Pacific (UNP) climbed 10.09% as Chief Executive Lance Fritz said he would step down. Hedge fund Soroban Capital Partners had called for his ouster.

Advancing issues outnumbered declining ones on the NYSE by a 1.69-to-1 ratio; on Nasdaq, a 1.41-to-1 ratio favored advancers.

The S&P 500 posted 4 new 52-week highs and 8 new lows; the Nasdaq Composite recorded 71 new highs and 102 new lows.

Volume on US exchanges was 9.89 billion shares, compared with the 10.72 billion average for the full session over the last 20 trading days.

(Reporting by Chuck Mikolajczak; Editing by David Gregorio)

NEW YORK, Feb 22 (Reuters) – Cracks are widening in an early-year rally in stocks, as rising Treasury yields bolster the allure of bonds and skew equity valuations.

For weeks, stocks have largely withstood a rise in Treasury yields that has come amid signs that the Federal Reserve may have to raise rates higher than expected to cool the economy and tame inflation.

Market participants warn, however, that yields are reaching a danger zone where equities quickly lose their luster. Yields on six-month Treasuries, for example, are at their highest in nearly 16 years, offering investors 5.02% on an asset many consider far safer than stocks.

“All of a sudden inflation is a little bit stronger than we thought and the Fed looks like they will keep raising rates, and that’s absolutely a challenge for stocks when you can get short-term paper that yields 5%,” said Jonathan Golub, chief US market strategist at Credit Suisse.

Stocks are still sitting on sizeable year-to-date gains, though some of their rally has melted away in recent days. The S&P 500 is down 4.4% from its recent highs, but remains up 4.1% year-to-date. The index fell more than 2% on Tuesday, its worst single-day drop of 2023.

The benchmark 10-year Treasury yield, which moves inversely to bond prices, is up around 60 basis points from its January lows.

Some strategists warn that a so-called no-landing scenario, where the Fed is not able to cool the economy anytime soon, could force policymakers to dole out more of the rate increases that shook markets last year, potentially pushing yields even higher.

Strategists at BlackRock, the world’s largest asset manager, said on Tuesday that policy tightening from the Fed would likely be “bad news for risk assets.”

The firm said it was increasing allocations to short-term Treasuries, keeping exposure to developed market stocks at an “underweight” and increasing exposure to emerging markets.

“Fixed income finally offers ‘income’ after yields surged globally,” the firm’s strategists wrote. “This has boosted the allure of bonds after investors were starved for yield for years.”

‘DEATH ZONE’

Markets on Tuesday afternoon were pricing in a 24% chance that the Fed raises rates by 50 basis points at its March 22 meeting, up from a 0% chance a month ago, according to CME’s FedWatch tool.

Analysts at Morgan Stanley, meanwhile, noted on Tuesday that the equity risk premium – or the potential reward that investors gain by holding stocks over bonds – has now fallen to levels last seen in 2007 due to higher yields and the likelihood of earnings disappointments ahead.

That is a “death zone” that makes the “risk-reward very poor” for stocks, strategist Michael Wilson wrote.

“We believe the risks are extreme now and nearly impossible to justify with any narrative one wants to conjure up,” Wilson said.

Golub, of Credit Suisse, is bullish on non-US stocks, which he said are trading at more attractive valuations at a time when rising yields and inflation could pressure US corporate costs.

The Stoxx 600 index of European companies, for example, trades at a forward price to earnings ratio of 12.8, well below the 18.2 seen in the S&P 500, while Japan’s Nikkei 225 trades at a forward P/E of 15.4.

“If you go outside of the US, you can get better underlying corporate profit growth for less money,” Golub said.

To be sure, bullish investors might have history on their side, thanks in part to January’s hefty 6.2% gain for the S&P 500. Years in which the S&P 500 has advanced in January have posted an additional gain in the subsequent February-December period 83% of the time, with an average 11-month rally of over 11%, according to CFRA Research.

Others see a stalemate ahead where markets make little headway. Elizabeth Burton, client investment strategist at Goldman Sachs, expects higher yields to weigh on technology stocks. At the same time, she believes many investors will be hesitant to sell equities after last year’s steep declines, when the S&P 500 lost 19.4%. The firm has a neutral outlook for the next 12 months.

“This is becoming more of a stockpicker’s environment where you can’t count on a rising tide lifting all boats,” she said.

(Reporting by David Randall in New York; Editing by Ira Iosebashvili and Matthew Lewis)