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S&P 500 Surpasses Previous High After Inflation Report

Wall Street is back in rally mode, with investors seizing the latest sign that interest rates could start falling this year.

The S&P 500 rose 1.2% on Wednesday, adding to three straight weeks of gains and surpassing its previous record set on March 28.

It’s a stark change from the gloomy mood that helped send the index down more than 5% in early April as investors grew accustomed to the idea that high interest rates could persist for longer, weighing on the economy and markets.

New inflation data on Wednesday morning helped the index surpass its previous record high. The S&P 500 is now nearly 7% above its most recent April low.

Wednesday’s report – data from the closely watched Consumer Price Index – showed a slight slowdown in the pace of price increases, in line with economists’ expectations. Investors welcomed the figures and the return to the trend of a gradual decline in inflation after months of disappointing data which had shaken financial markets and sent stock prices lower.

“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, choosing instead to focus on robust growth that supported the stock market. This propelled the market to repeated record highs through March.

Then, in early April, things changed. After a third successive CPI report undercut the trend of gradually slowing inflation, concerns began to set in that the Federal Reserve might not only delay rate cuts but instead raise rates of interest. The S&P 500 index has fallen for three straight weeks, its worst performance of the year so far, falling a total of 5.5% from its April 19 high.

Investors became more optimistic again this month, when Fed Chairman Jerome H. Powell warned of the likelihood that the central bank would raise interest rates. Then, a report last week showing slowing hiring in April, as well as lower wage inflation, called into question the possibility of a rate cut this summer, giving a boost to the stock market.

“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 major test for the market, either undermining the relief that came from April’s jobs report or, as turned out to be the case, supporting it.

The two-year Treasury yield, which is sensitive to changes in interest rates, fell to just above 4.70 percent, from more than 5 percent in late April, amid fears of rising yields. rates have calmed down. The benchmark 10-year Treasury yield, which underpins borrowing around the world, has fallen to around 4.35 percent, from 4.7 percent over the same period.

Investors in futures markets are now betting that the Fed will likely cut interest rates by a quarter of a percentage point in September, assuming there are no further disruptions in disinflation that could push stocks falling.

Another big tailwind was better-than-expected results, as company executives spent the last few weeks updating investors on their profitability in the first three months of the year and where they see the future heading. economy from now on.

Corporate profits have so far increased by 5.4 percent, with just over 90 percent of companies reporting their financial results on Friday. At the end of March, analysts expected growth of just 3.4 percent.

On Friday, the S&P 500 recorded its third consecutive week of gains, a feat it had not achieved since mid-February. Importantly, the Russell 2000 stock index, made up of smaller companies more exposed to the ebbs and flows of the U.S. economy, is also now positive this year, after rallying in recent weeks. The index rose 1 percent on Wednesday.

Mr Kelly said that after the “tumultuous” changes of recent years – including the pandemic and the wars in Ukraine and Gaza – a “balance” had started to return to the economy.

“We are settling into a boring economy and boredom can last a long time,” he said.

J. Edward Moreno reports contributed.

News Source : www.nytimes.com
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