The U.S. Stock Market Slips After A Three-Day Break

U.S. stock markets opened lower on Tuesday, retracing some of the gains from the previous week, as investors awaited further signals from the Federal Reserve regarding interest rates. The market sentiment was also influenced by China's monetary stimulus efforts in the world's second-largest economy.

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Here is how the major indices were trading:

• The Dow Jones Industrial Average declined by 324 points, or 0.9%, to reach 33,974.
• The S&P 500 dropped by 34 points, or 0.7%, settling at 4,375.
• The Nasdaq Composite decreased by 97 points, or 0.7%, to stand at 13,591.

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During the previous week, the Dow Jones Industrial Average fell by 109 points, or 0.32%, closing at 34,299. The S&P 500 experienced a decline of 16 points, or 0.37%, finishing at 4,410. The Nasdaq Composite dropped by 93 points, or 0.68%, reaching 13,690.

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Investors demonstrated a cautious approach at the beginning of the trading session following the U.S. long weekend, which observed the Juneteenth federal holiday. This retreat followed a strong performance in the markets during the previous week. The S&P 500 recorded a gain of 2.6% last week, marking its fifth consecutive week of growth, while the tech-heavy Nasdaq Composite achieved its eighth consecutive week of gains.

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Mike Wilson, Chief U.S. Equity Strategist at Morgan Stanley, noted that both retail and institutional investor sentiment currently sit at their highest levels in over two years. However, he expressed reservations about fully endorsing the prevailing optimism and the supporting narrative for equity prices, given his fundamental view on growth. Wilson emphasized that if growth accelerates as expected in the second half of the year, it would validate the bullish narrative driving equity prices.

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In terms of economic data, housing starts figures were released on Tuesday, revealing a significant 21.7% surge in May following a revised 2.9% decline in April. Building permits also saw an increase of 5.2% in May, with the midwest region experiencing a particularly notable rise. These numbers reflect robust demand and limited supply in the existing home sales market.

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Earlier, China made a modest reduction of 10 basis points in its 1- and 5-year lending rates. Investors viewed this move as relatively minor, especially following a state council meeting on Friday that did not yield significant concrete measures. Societe Generale had anticipated a 15 basis point cut in the 5-year rate, which serves as the benchmark for mortgages. As a result, the Hang Seng index in Hong Kong declined by 1.5%.

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Alibaba, the Chinese internet giant, attracted attention after announcing the departure of its CEO and chairman, who will now focus on the company's cloud division. Brooklyn Nets owner Joseph Tsai is set to become the chairman.

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Later in the day, a panel featuring New York Federal Reserve President John Williams and Fed Vice Chair for Supervision Michael Barr is scheduled. On Wednesday, Fed Chair Jerome Powell is expected to deliver his semi-annual congressional testimony.

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According to Chris Larkin, Managing Director of Trading and Investing at E*TRADE from Morgan Stanley, Powell's remarks on Capitol Hill will likely be the primary focus for traders this week. Last week, investors received data showing a cooling inflation rate for May and an indication that the Fed would not raise interest rates for now. However, they also had to interpret hints from the Fed suggesting the possibility of further rate hikes later this year, despite the pause in June.

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Larkin stated that Powell's comments could shape how the market, especially the technology sector, which has led the year's rally, reacts to Fed policy in the short term.

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Additionally, investors are considering the implications of student loan payments resuming this fall and the potential impact on consumers' disposable income. Student loan payments have been on hold since the start of the pandemic in March 2020.

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