The Dow Jones Industrial Average climbed more than 450 points to a record close Wednesday after fresh inflation data showed a muted increase and eased fears of a rapid rise in interest rates.
The blue-chip index jumped 464.28 points, or 1.5%, to 32297.02, marking its 11th record of 2021 and first close above 32000.
The S&P 500 gained 23.37 points, or 0.6%, to 3898.81. The Nasdaq Composite, meanwhile, lost 4.99 points, or less than 0.1%, to 13068.83, after rising more than 1.5% in morning trading on the back of Tuesday’s rally.
The gains for staid Dow stocks and losses for momentum-driven tech stocks are becoming a familiar pattern. Markets have seesawed in the past few weeks as investors have watched yields on U.S. government debt surge amid expectations of both higher inflation and an economic recovery.
Those higher yields have narrowed the relative valuation gap between safer bonds and riskier stocks and made bond returns more attractive to some investors.
“We have seen a genuine rotation from growth to value,” said Altaf Kassam, head of investment strategy for State Street Global Advisors in Europe. “The companies that were laggards before, like financials and energy, have ruled the roost lately.”
Since the pandemic started last year, investors have discounted some economic data, in favor of betting on an expected rebound. Now, though, those looking ahead are watching for signs of inflation, and by extension changes in monetary policy, said ThinkMarkets analyst Fawad Razaqzada. That could blunt the long rally’s momentum.
“People will be expecting bond yields to edge higher,” he said. “The potential gains in U.S. stocks are going to limited from here.”
There weren’t any flashing inflation warnings on Wednesday. Fresh data showed that a key inflation gauge rose 0.4% last month, in line with expectations. That helped assuage concerns that a sharp increase in inflation would prompt the Federal Reserve to tighten monetary policy.
The yield on the benchmark 10-year Treasury note fell to 1.520% from 1.545% on Tuesday. This year’s steep rise in yields, which had fallen as low as 0.915% at the start of 2021, partly reflects expectations that the Fed will boost short-term interest rates.
That is because improved economic prospects are fueling bets on sectors such as banking and energy that would benefit from a rebound, and away from the technology stocks that rallied during Covid-19 lockdowns last year. That has given a boost to the Dow industrials, which have outperformed the S&P 500 this year.
Indeed, on Wednesday the best sectors in the S&P 500 were energy, up 2.6%; financials, up 1.9%; and materials, up 1.6%. Tech was the only sector to drop, losing 0.4%.
GameStop, a favorite of day traders, rose $18.10, or 7.3%, to $265, paring earlier gains of more than 40% and evoking its manic January run.
While slicing the market into growth and value simplifies the landscape for investors, what really drove the market last year were stocks that had an almost cultlike popularity, said David Bahnsen, managing partner of Bahnsen Group. Those stocks got overheated and overvalued, he said, while a swath of profitable, stable names were significantly undervalued, so it was “incredibly foreseeable” that investors would eventually flip on both.
“It’s a reversal of a popularity contest,” he said.
In the afternoon, the U.S. government auctioned off $38 billion in 10-year Treasury notes. Demand for the 10-year note was in line with recent auctions, with $2.38 of bids for every dollar of Treasuries sold. There were fears that demand would be weaker. The U.S. government’s extraordinary borrowing spree has tested investors’ appetite for new Treasury debt, which is also contributing to pushing yields higher.
Federal Reserve officials have said they would allow inflation to exceed 2% for a spell, before tightening policy. That might take longer than many investors are anticipating, said Willem Sels, chief investment officer at HSBC Private Bank.
“Inflation is still capped by the fact that the demand is still relatively weak in a lot of sectors,” he said. In the longer term, Mr. Sels expects inflation to be low, as government stimulus measures are followed by stringent belt tightening. “It will take a long time before we get to the 2% target.”
Overseas, the pan-continental Stoxx Europe 600 edged up 0.4%. Asian stock markets were mixed. Hong Kong’s Hang Seng rose 0.5%, while Japan’s Nikkei 225 added less than 0.1%. China’s Shanghai Composite Index edged down less than 0.1%.
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