The winning streak of Wall Street continued for a fourth consecutive day on Thursday after receiving indications that inflation is gradually becoming less burdensome for the economy.
The S&P 500 experienced a 0.8% increase, rising by 37.88 points to reach 4,510.04 – its highest closing value since April 2022. Meanwhile, the Dow Jones Industrial Average saw a 0.1% rise of 47.71 points, closing at 34,395.14. The Nasdaq composite had a significant surge of 1.6%, rallying 219.61 points to reach 14,138.57, with Big Tech stocks leading this upward movement.
The S&P 500 is set to have its seventh week of gains out of the last nine, as recent data suggests that inflation is slowing down. This has raised hopes that the Federal Reserve will soon stop increasing interest rates. In June, inflation at the wholesale level was lower than anticipated, with producers paying only 0.1% more compared to the previous year. This is a significant decrease from the 11.2% inflation experienced last summer.
Investors have been concerned about a potential recession primarily due to the significant inflation. The Federal Reserve has increased interest rates as a measure to regulate prices, which has resulted in this fear. The high rates directly impede inflation by slowing down the overall economy and negatively impacting investment prices. Additionally, they can lead to unforeseen disruptions in certain sectors of the economy.
Traders are confident that the Federal Reserve will increase the federal funds rate at its meeting in two weeks, reaching the highest level since 2001. However, recent inflation data has led traders to speculate that this could be the last rate hike in the current cycle.
According to a report released on Wednesday, consumer prices in June were 3% higher compared to the previous year. This marks a significant decrease from the inflation rate of over 9% experienced during the summer of last year. Deutsche Bank economists refer to this as a “cool summer breeze.”
As traders reduced their expectations for future interest rate increases by the Federal Reserve, Treasury yields continued to decline in the bond market.
The yield on the 10-year Treasury decreased from 3.86% on Wednesday and from 3.98% on Tuesday, now resting at 3.76%. This decrease in yield influences the interest rates for mortgages and other significant loans.
The yield on the two-year Treasury decreased from 4.75% on Wednesday and 4.89% on Tuesday to 4.63%. It tends to fluctuate based on predictions of actions taken by the Federal Reserve.
Yields started to decline faster when James Bullard announced in the afternoon that he would resign as president of the St. Louis Federal Reserve Bank and assume the dean role at Purdue University’s business school next month. Bullard was known for advocating for increased interest rates to manage inflation.
Lower interest rates benefit various types of investments. However, numerous investors perceive that significant gains will be experienced by technology and other high-growth stocks.
Amazon, Alphabet, and Nvidia emerged as major drivers behind the rise of the S&P 500. Amazon reported a 2.7% increase after announcing that Tuesday’s first day of its annual Prime Day event broke records, becoming its most successful sales day.
The Alphabet stock increased by 4.7% following the announcement from Google that they are expanding the availability of Bard, their chatbot powered by artificial intelligence, to numerous countries worldwide and introducing additional functionalities.
Nvidia, a major player in the AI industry causing excitement on Wall Street, experienced a 4.7% increase.
PepsiCo’s stock rose by 2.4% after surpassing analysts’ predictions for profits in the spring. Although there was a decrease in demand for beverages and snacks, increased prices contributed to higher earnings for the company. Additionally, PepsiCo has raised its overall projections for the year’s outcomes.
The season for reporting earnings has recently begun, and on Friday, JPMorgan Chase will be the first of many banks to disclose their profits during the spring period. The general outlook is not optimistic, as analysts predict a significant decline in earnings for S&P 500 companies, the most significant drop since the global economy was severely impacted by the pandemic in 2020.
Despite the potential for a recession, the job market has proven resilient and helped keep the economy afloat. Recent data indicated fewer people filed for unemployment benefits last week than predictions. However, it should be noted that an excessively robust job market may lead the Federal Reserve to take more assertive measures regarding interest rates and managing inflation.
Chun Wang, a senior research analyst, and co-portfolio manager at Leuthold, cautioned that although inflation is displaying positive signs, there is a risk that Wall Street is hastily becoming convinced that it will decrease enough for the Federal Reserve to reduce interest rates and avoid a recession.
According to Wang’s report, there is concern that the market is not adequately considering the possibility of inflation remaining at 3% to 4% in the next six to 12 months. Wang suggests that both inflation and the Federal Reserve’s policy may not be easily predictable, as there is a suspicion that the prevailing belief of a smooth economic transition will be strongly contested shortly.
Exxon Mobil experienced a decline in the stock market on Thursday. The company’s stocks fell by 1.8% after announcing the acquisition of Denbury, which possesses carbon dioxide pipelines. This acquisition is valued at $4.9 billion in stock. As a result of this news, Denbury’s stocks also experienced a decrease of 1.3%.
