NEW YORK (AP) — Wall Street staged its biggest comeback in years on Thursday, as stocks rebounded from steep morning losses caused by a worse-than-expected inflation report.
The S&P 500 jumped to a 2.6% gain, a stunning reversal after previously falling as low as 2.4% and touching its lowest level in nearly two years. The Dow Jones Industrial Average swung more than 1,500 points from its low to its high. The rallies were the largest for each index since March 2020.
Other markets around the world also veered sharply from losses to gains, while analysts offered possible reasons for the reversal, but little concrete.
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Besides stocks, prices also initially fell for bonds and cryptocurrencies in the knee-jerk reaction to a disappointing report from the US government, which showed inflation spreading more widely through the economy. A component that is closely watched by policymakers and investors has hit its highest level in 40 years.
This has forced investors to brace for continued steep interest rate hikes by the Federal Reserve to rein in inflation and the potential recession these moves could create. The Dow Jones Industrial Average fell 549 points shortly after the report was released, and the Nasdaq fell 3.2%.
The crisis did not last. Shares soared, pushing the Dow Jones up 827.87 points, or 2.8%, to 30,038.72. The Nasdaq climbed 232.05 points, or 2.2%, to 10,649.15. The benchmark S&P 500, which briefly rose 3%, rose 92.88 points to 3,669.91. The gains ended a six-day losing streak for the S&P 500 and Nasdaq.
Stocks of smaller companies also rallied after an initial decline. The Russell 2000 rose 40.65 points, or 2.4%, to close at 1,728.41.
“Anyone who had hoped for a pivot, a pause or a slowdown in Fed policy tightening for the next meeting, was dashed today,” said Liz Young, chief strategist for the Fed. investments at SoFi. “I literally can’t even fathom what the logic of buying (stocks) would be if Fed policy changed.”
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Equities in Europe also rallied after losses caused by inflation data in the United States, while Treasury yields retreated slightly from their initial surge. The value of the US dollar against other currencies fell after initially surging.
This is the latest erratic back and forth for markets, which have swung wildly due to all the uncertainties surrounding economies around the world and the severity of rising interest rates that will hurt them.
Analysts said some data points buried deep in the inflation report could raise hopes that inflation is about to peak and then decline, even though current conditions look austere. Others said technical reasons could also help support markets as some investors closed trades betting on dips following the inflation report.
“Hopefully it’s because people have been digging into the details of the inflation report and noticing some signs that we might get inflation relief by the end of the year,” said Brian Jacobsen, senior investment strategist at Allspring Global Investments.
“Markets have spoken to each other of a ledge, so to speak, and they’re a little more bullish,” said Kristina Hooper, chief global market strategist at Invesco.
Young noted that the dollar’s decline against other currencies, such as the pound, could be a tailwind for equities, but not enough to cause such a sharp turn in the market.
“It’s absurd to me that the market is going up so strongly,” she said.
Most investors entered the morning already expecting the Fed to raise its overnight rate by three-quarters of a percentage point next month, which would be its fourth straight hike that was triple the usual size.
But Thursday’s disappointing data led some investors to expect a fifth such increase in December, dashing hopes that the Fed could soon begin to downgrade. Bets have risen that the Fed will take its key rate above 5% early next year. The federal funds rate started this year at virtually zero.
Higher rates make buying a house, car or anything else bought on credit more expensive, and the hope is that this will slow the economy and the labor market enough to reduce inflation. . But higher rates take a notoriously long time to take full effect, and the Fed risks triggering a recession if it ends up going too far.
As the day progressed and investors had more time to dig into the details of the inflation report, analysts said they may have seen some glimmers of hope. Although so-called “core” inflation accelerated last month, headline inflation, including food and energy prices, has slowed somewhat.
The headline consumer price index, also known as the CPI, was 8.2% higher in September than a year earlier, compared with inflation of 8.3% in August.
“If you’re at least starting to see the headline CPI cool, there’s hope that the core CPI will follow,” Hooper said. “There’s definitely that thought process that comes into play.”
Quincy Krosby, chief global strategist at LPL Financial, said: “There is a view that because the CPI is a lagging indicator, higher rates will slow the economy more and more and inflation will recede to a faster pace.”
Treasury yields retreated slightly from their initial early morning jumps, easing some pressure on stocks.
The yield on the 10-year Treasury, which helps set rates for mortgages and many other loans, rose from 3.90% to 3.96% on Wednesday evening. Earlier today, it topped 4%.
The two-year yield, which moves more on Fed action expectations, rose to 4.48% from 4.29%. It topped 4.50% earlier in the morning.
Higher yields amplify pressure on the economy not only by making loans more expensive and slowing growth. They also drive down the prices of stocks, cryptocurrencies, and almost every other investment because they mean bonds pay more interest, which takes a few dollars away from other investments.
Investments seen as riskiest, most expensive or causing investors to wait the longest for strong growth have been hardest hit by this year’s rate hike.
AP Business Writers Joe McDonald and Matt Ott contributed. Veiga reported from Los Angeles.