Wall Street is back in rally mode, with investors taking advantage of recent signs that interest rates could start falling this year.
The S&P 500 rose 1.2 percent on Wednesday, posting gains for the third straight session and surpassing its previous record set on March 28.
This represents a significant shift from the sour sentiment that contributed to the index’s decline of more than 5 percent in early April as investors adjusted to the idea that high interest rates would last longer and the economy and markets could burden.
New inflation data on Wednesday morning provided the catalyst for the index to break its previous record. The S&P 500 is now almost 7 percent above its recent low in April.
Wednesday’s report – data from the closely watched consumer price index – showed a slight slowdown in the pace of rising prices, in line with economists’ expectations. Investors welcomed the figures and a return to the trend of a gradual decline in inflation after months of disappointing data that angered financial markets and pushed down stock prices.
“This is the first good CPI report in four months and the market likes it,” said Gary Pzegeo, head of fixed income at CIBC Private Wealth US.
At the start of the year, investors had largely ignored stubbornly high inflation data and instead focused on the robust growth underpinning the stock market. This resulted in the market hitting repeated records through March.
Then, in early April, things took a turn. After a third straight CPI report undermined the trend of a gradual slowing in inflation, concerns grew that the Federal Reserve could not only delay interest rate cuts but actually raise rates. The S&P 500 fell for three weeks in a row, its worst year so far, and has slipped a total of 5.5 percent from its peak through April 19.
Investors became hopeful again this month when Fed Chairman Jerome H. Powell poured cold water on the likelihood that the central bank would raise interest rates. Then a report last week showing a decline in hiring in April along with lower wage inflation brought the possibility of interest rate cuts this summer back into the picture and gave the stock market a boost.
“Those two things really helped the stock market,” said David Kelly, chief global strategist at JP Morgan Asset Management.
Wednesday’s CPI report was seen as the next big test for the market, one that would either undermine the relief coming from April’s jobs report or, as it turned out, support it.
The two-year Treasury yield, which is sensitive to changes in interest rates, has fallen to just over 4.70 percent from over 5 percent at the end of April as fears of rising interest rates have eased. The benchmark 10-year Treasury yield, which supports global borrowing, fell from 4.7 percent to about 4.35 percent over the same period.
Investors in futures markets are now betting that the Fed is likely to cut interest rates by a quarter of a percentage point in September, assuming there are no further disruptions in inflation that could drag down stock prices.
Another key tailwind was better-than-expected earnings results. Company executives have been updating investors in recent weeks on their profitability in the first three months of the year and where the economy is headed.
Corporate profits have risen 5.4 percent so far, and just over 90 percent of companies have reported financial results as of Friday. At the end of March, analysts had only expected growth of 3.4 percent.
On Friday, the S&P 500 posted its third straight week of gains, a feat it hasn’t achieved since mid-February. Importantly, the Russell 2000 stock index, which includes smaller companies more exposed to the ups and downs of the American economy, is also positive this year after rallying in recent weeks. The index rose 1 percent on Wednesday.
Mr Kelly said a “balance” had returned to the economy after the “turbulent” changes of recent years – including the pandemic and the wars in Ukraine and Gaza.
“We are getting used to a boring economy, and boredom can last for a long time,” he said.
J. Edward Moreno contributed reporting.
Source link
2024-05-15 23:28:29
www.nytimes.com
