NEW YORK: US stocks ended sharply lower on Tuesday as investors worried the Middle East conflict may persist long enough to ramp up inflation.
Selling was broad-based and the Cboe Volatility index registered its highest closing level since November. Still, indexes finished well off their lows of the day, with the S&P 500 ending down 0.9% after falling more than 2% early in the session.
Investors are concerned about the effect of the conflict, now in its fourth day, on inflation as oil prices extended sharp gains. Israeli and US forces hit targets across Iran, prompting Iranian retaliatory strikes around the Gulf as the conflict spread to Lebanon.
"There seems to be some notion that perhaps (the Iran war) will persist longer than people thought 24 hours ago, because it’s spreading and starting to potentially impact energy infrastructure," said Chuck Carlson, chief executive officer of Horizon Investment Services in Hammond, Indiana.
Tuesday, however, marked a second day where indexes cut sharp early losses.
Jed Ellerbroek, portfolio manager at Argent Capital, said the market's reaction to the conflict "so far is very tame," which suggests investors' tolerance for risk remains somewhat intact. He noted that software stocks, which had sold off recently, were outperformers. The S&P 500 software and services index rose 1.6%.
The Dow Jones Industrial Average fell 403.51 points, or 0.83%, to 48,501.27, the S&P 500 lost 64.99 points, or 0.94%, to 6,816.63 and the Nasdaq Composite lost 232.17 points, or 1.02%, to 22,516.69.
In a potentially bearish signal, the S&P 500 closed below its 100-day moving average for the first time since November 20.
"Investors are grappling with the volatility and the news, and they're looking at their portfolios and saying, wow, this could get worse... This is the fear of it getting worse," said Oliver Pursche, senior vice president and advisor at Wealthspire Advisors in Westport, Connecticut.
"But our advice to clients is to take a step back and wait and see."
Shares of Blackstone were down 3.8% after its flagship credit fund, BCRED, saw a surge in redemption requests.
Tehran's threat to attack any vessel attempting to transit the Strait of Hormuz, combined with production halts by several Middle Eastern oil and gas producers, has driven up global shipping rates and prices of crude and natural gas. The Strait, a critical chokepoint, carries roughly one-fifth of the world's total oil consumption.
President Donald Trump on Tuesday said he had ordered the US International Development Finance Corporation to provide political risk insurance and financial guarantees for maritime trade travelling the Gulf, adding that the US Navy could begin escorting oil tankers through the Strait of Hormuz if necessary.
Investors worry that the higher oil prices could fuel inflation and complicate central bank policy decisions already strained by tariff-driven price increases. US Treasury yields rose for a second straight session.
Declining issues outnumbered advancers by a 4.1-to-1 ratio on the NYSE. There were 137 new highs and 167 new lows on the NYSE.
On the Nasdaq, 1,262 stocks rose and 3,540 fell as declining issues outnumbered advancers by a 2.81-to-1 ratio. — Reuters
