Stocks rally on Wall Street, led by battered banks
NEW YORK — Stocks rallied on Wall Street on Tuesday as some of the most jaw-dropping moves from a manic reverse course on Monday.
THE&P 500 was up 1.5% in early trading after a report showed inflation was still elevated but falling. Shares of small and medium-sized banks have recovered some of their earlier plunges caused by fears that customers could withdraw all their money. Treasury yields climbed to mitigate their historic lows.
The Dow Jones Industrial Average rose 308 points, or 1%, to 32,127 as of 9:45 a.m. EST, while the Nasdaq composite was 1.9% higher.
A week ago, Wall Street expected Tuesday’s inflation report to be the most important data of the week, if not the month. The concern at the time was that inflation remained stubbornly high, which could force the Federal Reserve to again accelerate the pace of its interest rate hikes.
Such hikes can lower inflation by slowing the economy, but they increase the risk of a later recession. They have also hurt the prices of stocks, bonds and all sorts of other investments.
Tuesday’s report showed consumer inflation was 6% in February, compared to a year earlier. This was in line with economists’ expectations and represented a slowdown from January’s 6.4% inflation rate, but it’s still too hot.
In normal times, this could indeed necessitate an increase in the magnitude of rate hikes. The problem for the Fed is that it also faces a banking system and an economy that may already be cracking due to all of its rate increases since last year, which have come at the fastest pace in decades. That includes the second- and third-largest bank failures in U.S. history since Friday.
“The Fed is stuck between a rock and a hard place,” said Brian Jacobsen, senior investment strategist at Allspring Global Investments.
“Inflation has met expectations, but is still uncomfortably high. Financial tensions are intense. Caution would dictate that they take a break, but couple that with a stark warning that if inflation trends do not are not improving, they may need to increase further.
He said the Fed also had other tools to use besides rate hikes. Among them: The Fed could adjust the speed at which it shrinks its huge treasury of bond investments, an action that effectively tightens the screws on the financial system.
A looser Fed could give more breathing room to the banking system and the economy, but it could also breathe more life into inflation.
Financial sector stocks rose on Tuesday to recover some of their earlier steep declines. Financial Republic Bank climbed 43.4% after plunging 67.5% in the previous three days. Zions Bancorp. rose 14.4%, KeyCorp gained 16% and Charles Schwab jumped 9.6%
The US government announced a plan on Sunday evening to boost confidence in the banking system after the failures of Silicon Valley Bank on Friday and Signature Bank on Sunday. Banks are struggling as higher interest rates reduce the value of their investments, while fearing finicky customers will try to withdraw their money en masse to cause a run.
Some of the wildest action has been in the bond market, where the two-year Treasury yield plunged about half a percent on Monday. This is a movement of historic size for the bond market. Yields fell as investors piled into investments seen as safe and scaled back their expectations of future rate hikes by the Fed.
The two-year yield rose to 4.36% from 4.02% late Monday, another huge move.
The 10-year yield jumped to 3.66% from 3.55%. It helps set the rates for mortgages and other large loans.
European markets also rebounded after a large decline in Asia.
Bank stocks stabilized after statements late Monday by the head of the 20-nation euro zone finance ministers group, Paschal Donohoe, that Europe had “no direct exposure” to Silicon Valley Bank.
AP Business Writers Yuri Kageyama, David McHugh and Matt Ott contributed.