U.S. stocks ended a low-volume session down slightly on Wednesday, though well off earlier lows, after a weak report on housing construction and earnings in the technology sector dimmed investor sentiment. The Dow Jones Industrial Average lost 11 points to end at 10,426, weighed down by 12 of its 30 components. The S&P 500 index was down .52 at 1,109. The Nasdaq composite index was down 10.64 at 2,193.
Since late October, the prices of U.S. stocks and government bonds have been rising together, signaling that for now at least, investors remain in the sweet spot: Enjoying an environment in which interest rates are low and inflationary prospects are tame. In normal times, bonds should be moving in the opposite direction of stocks. A growing economy lifting the outlook for profits and stocks means that government bonds, the safest assets around, aren't that attractive, especially if inflation is perceived to erode the value of the fixed returns they provide. The yield on two-year notes, which is closely tied to the outlook for interest rates controlled by the Federal Reserve, rose from 0.76% at the start of the year to 1.4% in June. The yield on 10-year notes which is more of a reflection of inflation expectations, rose from 2.25% to 3.93% during the same period. But since then, as stocks continued to power ahead to reach fresh 13-month highs, yields on two-year notes have fallen back to 0.76% currently, and those on 10-year bonds are back down to 3.319%. The theme is now familiar. In voting to keep interest rates near zero-percent levels earlier this month, the Federal Reserve has also sent multiple signals that it would keep them there for the foreseeable future, noting that inflation pressures remained subdued.
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