Stocks closed higher again as more fear evaporates from Wall Street. The S&P 500 added 0.6% Thursday, its fifth gain in the last six days. The benchmark index is headed for a gain in March after struggling in earlier weeks on worries about whether the banking system was cracking under the weight of higher interest rates. Forceful actions by regulators worldwide have helped restore confidence. Also boosting stocks have been big bets that the Federal Reserve may cut rates in coming months. But such expectations are also raising concerns of their own for some professionals on Wall Street.
The S&P 500 was 0.4% higher in late trading. It pared an earlier, bigger gain, but it’s still on pace for a fifth up day in the last six. It’s been on a turnaround after struggling in earlier weeks on worries about whether the banking system was cracking under the weight of higher interest rates.
The Dow Jones Industrial Average was up 90 points, or 0.3%, at 32,811, as of 3:10 p.m. Eastern time, while the Nasdaq composite was 0.6% higher.
Forceful actions by regulators worldwide have helped build confidence that the current trouble for banks won’t torpedo the economy like the 2008 financial crisis did. Traders have also begun betting heavily that the Federal Reserve will have to cut interest rates soon. Such cuts could offer huge relief after a year of relentless hikes to rates, and they also tend to act like steroids for markets.
To be sure, all the recent ebullience has some professionals on Wall Street wary.
“Markets are pricing the best of both worlds: a recession that brings inflation down rapidly and keeps rates low, yet one where corporate earnings do not fall sharply,” according to analysts at Barclays led by Ajay Rajadhyaksha, global chairman of research.
They are skeptical and think both bonds and U.S. stocks look too expensive.
Since Silicon Valley Bank earlier this month became history’s second-biggest U.S. bank failure, Treasury yields in the bond market have tumbled as traders built bets the Federal Reserve would have to take it easier on interest rates.
The Fed has pulled its key overnight rate to a range of 4.75% to 5%, up from virtually zero at the start of last year, to drive down inflation. High rates can do that, but only by taking a blunt hammer to the entire economy. They also drag down prices for stocks and other investments.
The bet on Wall Street has been that the Fed may cut rates as soon as this summer, to release some of the pressure built up on the economy and banks. That has caused the price to soar and the yield to tumble for the two-year Treasury, which tends to move on expectations for Fed action.
Its yield plunged from above 5% earlier this month, when it was at its highest level since 2007, back below 3.60% last week. That’s a massive move for the bond market. It fell Thursday to 4.10% from 4.11% late Wednesday.
Expectations for easier rates in turn have helped to buoy the Big Tech stocks that dominate the S&P 500 and other indexes. That’s because tech and high-growth stocks are seen as some of the biggest beneficiaries of low rates.
Gains for Microsoft, Apple, Amazon, Nvidia and Tesla on Thursday were the strongest forces pushing the S&P 500 higher. Amazon rose 1.3%, while the others were up more modestly.
But many professionals on Wall Street are saying the Fed would likely cut rates only if a more serious recession for the economy were on the way, one that would pull down corporate earnings more sharply than what’s already expected.
The Fed has indicated it plans to raise rates one more time before holding steady through the end of this year. While it’s acknowledged that the turmoil for banks could almost act like a rate hike on its own, inflation is still too high for comfort.
“In sharp recessions – which seems to us the only way to justify bond market pricing, given how high US inflation is – corporate earnings easily drop 30-35%,” Rajadhyaksha and his Barclays colleagues wrote in a report. They added that Big Tech stocks would not be immune from such a downturn.
Nevertheless, the increasingly dominant force on Wall Street seems to be calm.
A measure of nervousness among stock investors on Wall Street on Thursday touched its lowest level since before a mad dash by Silicon Valley Bank customers earlier this month caused its failure and sparked the harsher scrutiny on banks globally.
Financial stocks in the S&P 500 went from gains in the morning to losses in the afternoon, and ther fade helped the overall index to pare its gains. But the movements were still more muted than they were earlier this month when fears about the banking system were at their height.
A report on Thursday showed that slightly more U.S. workers applied for unemployment benefits last week than expected. That could be a sign of increased layoffs, but the number still remains very low compared with history.
In a separate report, the government revised down its estimate for how much the U.S. economy grew during the last three months of 2022. But it also still showed growth.
“Today’s data may have some investors more willing to see the light at the end of the tunnel for rate hikes but remember a multitude of data will be released before the Fed’s next decision,” said Mike Loewengart, head of model portfolio construction at Morgan Stanley Global Investment Office.
On Friday, the Commerce Department issues its February report on consumer spending. That’s the heart of the U.S. economy. Perhaps more importantly, the report will also give the latest update on the measure of inflation that Fed policymakers prefer to use.
“And we have just seen how quickly the market can be disrupted by unplanned turmoil," Loewengart said, "so investors should remain alert.”