U.S. stocks hold their own after sell-off in global markets

U.S. markets rallied on Monday, shrugging off a sell-off in global stocks and beating back the sell-off that began on Friday in both stocks and bonds. Investors seemed satisfied that the Federal Reserve may not raise its influential interest rate as soon as feared.

U.S. stocks ticked downward in the opening minutes of trading Monday, but roared back by mid-afternoon. The Standard & Poor’s 500-stock index was up 31 points, or 1.5 percent, for the day. The Dow Jones industrial average surged by 240 points, gaining 1.3 percent. The tech-heavy Nasdaq climbed 1.7 percent.

The Fed has not raised rates since December, and some investors had begun to doubt that it would take action before the year is over. Officials have repeatedly delayed additional increases in the face of turmoil in the global economy and questions about the stamina of the U.S. recovery. In recent speeches, the Fed’s top brass have suggested the moment is drawing closer.

But on Monday, two Fed officials signaled caution. Fed Gov. Lael Brainard counseled “prudence” in the debate over whether to raise interest rates. She was the last central bank official to speak before the Fed’s highly anticipated meeting next week.

Brainard pointed out that inflation remained well below the Fed’s target of 2 percent, and there are signs that investors and the public may be doubting the central bank’s ability to achieve that goal. In addition, she said, the cost of goods has not spiked over the past two years despite clear gains in the job market, suggesting the Fed can take its time raising rates.

“The case to tighten policy preemptively is less compelling,” she said.

Earlier Monday, Atlanta Fed President Dennis Lockhart cautioned that he was wary of adding to the market volatility. He reiterated his call for a “serious discussion” of raising rates at the Fed’s meeting next week but did not pinpoint a timeline for action.

“Would you consider a policy setting one tick above the zero lower bound still appropriate?” Lockhart said, given the current readings of inflation and unemployment. “These are some of the questions on my mind as I approach the next few meetings.”

Those two statements were enough to calm the markets. Investors had been on edge since Friday after remarks from another top Fed official sparked speculation that the central bank could act soon.

“We’re in a phase again where markets are parsing every single word that Fed officials utter,” said Kelly Bogdanov, vice president and portfolio analyst for RBC Wealth Management.

Boston Fed President Eric Rosengren said there was a “reasonable case” for hiking amid improvements in the job market and a resilient economic recovery. He will have a vote on whether to act when the Fed meets in Washington next week to debate the issue.

Global stocks sank on Monday in a sell-off that broke a long summer respite in the markets. Equities in Europe and Asia had their worst performance since Britain voted to leave the European Union. Hong Kong’s Hang Seng index was off 3.4 percent, and Japan’s Nikkei was down 1.7 percent. The Stoxx Europe 600 Index lost 1 percent.

Crude oil prices also dropped by about 2 percent Monday morning to below $45 a barrel and then climbed back for a 0.4 percent gain in the afternoon.

The swings follow two months of unusual calm in equity markets. Before Friday, when the S&P 500 fell 2.45 percent, the index had not moved by more than 1 percent since July 8.

Over the next several months, investors may also keep a close eye on other central banks. The thinking is that stocks could sell off if the Fed and other central banks, including the European Central Bank and the Bank of Japan, begin to raise interest rates. The worry is that those rate increases could sweeten bond payouts, making stocks seem less appealing.

“A lot of investors worry that the only reason stocks have done as well as they have done is because monetary policy has been so accommodating,” said Russ Koesterich, head of asset allocation for BlackRock’s Global Allocation Fund. “And the fear is that if you start to withdraw that accommodation, that will remove one of the main pillars of the stock market rally.”