NEW YORK — Investors played it safe on Monday ahead of a potentially pivotal Federal Reserve meeting. While large company stocks ended the day little changed, smaller, riskier stocks slumped.
Fed policymakers start a two-day meeting Tuesday, and many investors expect the central bank to indicate it is moving closer to raising its key interest rate as the economy strengthens. The Fed has held the rate close to zero for more than five years, and stocks have surged against that backdrop.
“Reading the tea leaves, it seems that investors are trying to position themselves for a more aggressive Fed,” said Jack Ablin, chief investment officer at BMO Private Bank.
The Dow Jones industrial average rose 43.63 points, or 0.3 percent, to 17,031.14. The Standard & Poor’s 500 index dropped 1.41, or 0.1 percent, to 1,984.13. The Nasdaq composite fell 48.70 points, or 1.1 percent, to 4,518.90.
The Russell 2000 index, an index of small company stocks, slipped 14.09 points, or 1.2 percent, to 1,146.52.
Higher interest rates mean that companies and consumers have to pay more to borrow, leaving them with lower profits and less money to spend.
Smaller-company stocks are more vulnerable to a sell-off because their valuations have become more stretched as the stock market has rallied, BMO’s Ablin said.
The average price-earnings ratio, a measure of a company’s stock against next year’s earnings, has climbed to 15.5 from 12.6 at the start of 2013 for S&P 500 companies. For companies in the Nasdaq composite, that ratio has risen to 19.8 from 14.9 in the same period.
The news on the economy on Monday was mixed.
U.S. manufacturing output declined in August for the first time in seven months, reflecting a sharp fall in production at auto plants. Output at manufacturing plants fell 0.4 percent in August after a 0.7 percent rise in July, the Federal Reserve reported.
On the other hand, a gauge of manufacturing in New York state jumped to 27.5 in August from 14.7 in July.
