Wall Street rallies for best week since June on rate hopes
Wall Street piled more gains Friday onto its mammoth rally from a day earlier to close out its best week since the summer.
The Standard & Poor’s 500 rose 0.9% a day after soaring 5.5% for its best day in more than two years. The Dow Jones industrial average added 32 points to its surge of more than 1,200 a day earlier, while the Nasdaq composite jumped 1.9%.
Markets got a boost after China relaxed some of its strict anti-COVID measures, which have been hurting the world’s second-largest economy. Hopes for more growth from China helped not only stocks but also oil prices to rise, with U.S. crude rising 2.9% to $88.96 per barrel.
The main reason for this week’s euphoria in markets was a report on Thursday showing inflation in the United States slowed more than expected last month. That raised hopes that the worst of inflation may have passed and that the Federal Reserve can be less aggressive about raising interest rates to get it under control. But analysts cautioned that high inflation could be slow to fall and some called Wall Street’s big rally overdone.
What the Fed does with rates is crucial for Wall Street because hikes slow the economy and can cause a recession, all while dragging down stock prices. Rate increases have been the main reason for markets’ struggles this year.
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Perhaps just as important as how bad inflation is at the moment is how high U.S. households see it being in future years. That’s because too-high expectations can trigger a vicious cycle in which people accelerate purchases and make other moves that inflame inflation further.
The Fed has said preventing such a doom loop is one of the reasons it has moved so aggressively on rate hikes. Inflation expectations are currently high relative to history, but a preliminary report on Friday suggested they’re not moving very much.
The median expectation for inflation in the coming year among households rose to 5.1% from 5% a month earlier, according to a survey by the University of Michigan. Expectations for long-run inflation, meanwhile, ticked up to 3%. But that’s still within the same 2.9%-to-3.1% range where they’ve been for 15 of the last 16 months.
High inflation helped knock down the survey’s reading for overall consumer sentiment by more than economists expected.
“The consumer is laser-focused on inflation and they’re feeling it every day,” said Brian Price, head of investment management at Commonwealth Financial Network. “I wouldn’t expect that we see any upside with regard to consumer sentiment until inflation comes under control.”
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The Fed has already lifted its key overnight interest rate to a range of 3.75% to 4%, up from basically zero in March. The likely scenario is still for it to increase rates further into next year, and then to hold rates at that high level for some time.
The hope for markets is that a softening in inflation could mean the Fed will hold the line at a lower, less-painful level for investors than it would have otherwise.
“They’ve been pretty clear all along they were going to front-load the interest rate increases,” Price said. “They need some time to evaluate the data over the next few months.”
Traders are increasingly betting the federal funds rate could top out around a range of 4.75% to 5% by early next year, according to CME Group. A week ago, they saw a higher ultimate rate as more likely, with a sizable chunk expecting something like 5.25% to 5.50%.
Bond markets were closed for trading in observance of Veterans Day. On Thursday, yields plunged as investors pared back their expectations for how aggressively the Fed will raise rates.
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The S&P 500 rose 36.56 points to 3,992.93, and its 5.9% gain for the week was its third in the last four and its biggest since June. The Dow rose 32.49 points, or 0.1%, to 33,747.86, and the Nasdaq climbed 209.18 points, or 1.9%, to 11,323.33. Both also notched hefty gains for the week.
The market has routinely reacted with exaggerated swings after each month’s inflation data report, said Jonathan Golub, chief U.S. equity strategist at Credit Suisse. And although Thursday’s report “was clearly a big positive, the market’s response appears out of sync with the size of the surprise.”
Companies that do a lot of business in China and around the region were particularly strong Friday after the relaxation of anti-COVID restrictions. Wynn Resorts rose 8.3% and Las Vegas Sands gained 5.5%.
Tapestry rose 8.7% and Ralph Lauren rose 9.4% to also help lead the S&P 500 higher. Both companies reported stronger profits for the latest quarter than expected.
On the losing end were healthcare companies. Elevance Health dropped 5.8% and Cigna fell 6%.
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In the crypto market, meanwhile, prices sank again amid the industry’s latest crisis of confidence. One of the bigger trading platforms, FTX, filed for bankruptcy protection after its users began scrambling to pull out their money on fears about its financial strength and after a bigger rival nixed a deal to buy the troubled company.
The exchange and its founder are under investigation by the Department of Justice and Securities and Exchange Commission, and rivals have said FTX’s failure could dent confidence in the broader industry.
Bitcoin fell below $16,800, down 6% from a day earlier, according to CoinDesk. It set its record of nearly $69,000 almost exactly a year ago, and it was above $21,000 a week ago.
