Banners for Pinterest, displayed to mark the fifth anniversary of the company’s listing, hang on the front of the New York Stock Exchange in New York on Wednesday, May 15, 2024. U.S. stocks are rising toward records with hope that inflation is heading back in the right direction. (AP Photo/Peter Morgan)
NEW YORK — Hopes that inflation is finally heading back in the right direction swept through Wall Street Wednesday and ignited a record-setting rally for U.S. stocks.
The S&P 500 jumped 1.2 percent to top its prior high set a month and a half ago. The Nasdaq composite added 1.4 percent to its own record set a day earlier, and the Dow Jones Industrial Average gained 349 points, or 0.9 percent, to beat its all-time high set in March.
Relief came from the bond market, where Treasury yields eased to release some of the pressure on the stock market. The moves resulted from strengthening expectations among traders that the Federal Reserve may indeed cut its main interest rate this year.
Stocks that tend to benefit the most from lower interest rates helped lead the market. Homebuilders were strong on hopes that cuts by the Fed could lead to easier mortgage rates, with Lennar, D.R. Horton, and PulteGroup all rallying more than 5 percent. Big Tech and other high-growth stocks also rode the wave of expectations for lower rates, and Nvidia’s gain of 3.6 percent was the strongest force pushing the S&P 500 upward.
Real-estate stocks in the S&P 500 climbed 1.7 percent, while stocks of electricity companies and other utilities rose 1.4 percent. The dividends they pay look better to investors when bonds are paying less in interest.
Consumer inflation
The optimism came from a report showing U.S. consumers had to pay prices for gasoline, car insurance, and everything else in April that were 3.4 percent higher overall than a year earlier. While that’s painful, it’s not as bad as March’s inflation rate of 3.5 percent.
READ: US consumer inflation eased slightly in April, in good news for Biden
Perhaps more importantly, the slowdown was a relief after reports for the consumer price index, or CPI, earlier this year had consistently come in worse than expected. That string of disappointing data had washed out forecasts for the Federal Reserve to lower its main interest rate soon.
The federal funds rate is sitting at its highest level in more than two decades, and a cut would goose investment prices and remove some of the downward pressure on the economy.
“There was a lot lying on today’s CPI print to prove that disinflation was simply delayed these last three months and not derailed,” according to Alexandra Wilson-Elizondo, co-chief investment officer of the multi-asset solutions business in Goldman Sachs Asset Management.
A separate report showed no growth in spending at U.S. retailers in April from March. It was a weaker showing than the 0.4 percent growth economists expected.
Slowing growth in retail sales could be seen as a positive for markets because it could reduce the upward pressure on inflation. But a stalling out also raises worries about cracks forming in U.S. consumer spending, which has been one of the main pillars keeping the economy out of a recession. Pressure has grown particularly high on lower-income households.
Consumer spending
“Hopefully the consumer isn’t running out of steam, but with pandemic savings spent, rising delinquencies, slower wage growth, and now flat retail sales, a more abrupt slowing of the economy can’t be ruled out,” said Brian Jacobsen, chief economist at Annex Wealth Management.
READ: US Fed’s Powell says inflation fight may take ‘longer than expected’
That could threaten one of the main hopes that’s rallied the U.S. stock market toward its records: The Federal Reserve can pull off the balancing act of slowing the economy enough through high interest rates to stamp out high inflation but not so much that it causes a bad recession.
A separate discouraging report released in the morning, meanwhile, said manufacturing in New York state is contracting more than expected.
On Wall Street, Petco Health + Wellness helped lead the market after soaring 27.9 percent. It named Glenn Murphy, who is CEO of investment firm FIS Holdings, as its executive chairman.
‘Meme’ stocks
On the losing end were GameStop and AMC Entertainment, as momentum reversed following their jaw-dropping starts to the week. GameStop fell 18.9 percent, though it’s still up 126.5 percent for the week so far.
AMC Entertainment sank 20 percent after it said it would issue nearly 23.3 million shares of its stock to wipe out $163.9 million in debt.
All told, the S&P 500 rose 61.47 points to 5,308.15. The Dow added 349.89 to 39,908.00, and the Nasdaq jumped 231.21 to 16,742.39.
In the bond market, the yield on the 10-year Treasury eased to 4.34 percent from 4.45 percent late Tuesday. The two-year yield, which moves more closely with expectation for Fed action, sank to 4.72 percent from 4.82 percent.
READ: Asian markets follow Wall St. higher ahead of U.S. key inflation update
Traders are now forecasting a nearly 95 percent probability that the Fed will cut its main interest rate at least once this year, according to data from CME Group. That’s up from just below 90 percent a day before.
In stock markets abroad, Shanghai’s fell 0.8 percent after China’s central bank left a key lending rate unchanged. Indexes were mixed elsewhere in Asia and modestly higher in Europe.