Stocks rebounded from a midday slump and closed higher on Thursday, keeping the major indexes on track for their first weekly gain in four weeks.
The Standard & Poor’s 500 index closed 0.7% higher after recovering from an early 0.9% decline. The Dow Jones industrial average and the Nasdaq composite each gained 0.6% after going through their own bumpy rides. The indices are on pace for a weekly gain after posting losses the previous three weeks.
Wall Street had its eye on interest rates as the European Central Bank made its biggest rate hike ever to fight inflation. The move is in line with actions taken by the US Federal Reserve and other central banks.
Investors also heard from Fed Chairman Jerome H. Powell, who reaffirmed the central bank’s commitment to keep rates high for as long as necessary to control inflation.
Traders “were initially caught off guard by the Fed’s tough stance on fighting inflation,” said Sam Stovall, chief investment strategist at CFRA. “But once investors realized he wasn’t saying anything different than what he had said before, markets pulled back.”
The S&P 500 rose 26.31 points to 4,006.18. It is up 2.1% so far this week.
The Dow went from a loss of 259 points to a gain of 193.24 points, closing at 31,744.52. The Nasdaq gained 70.23 points to 11,862.13.
Small company stocks also gained ground after an initial pullback. The Russell 2000 rose 14.90 points, or 0.8%, to 1,846.91.
Stocks have mostly lost ground in recent weeks after the Federal Reserve signaled it would not stop raising interest rates anytime soon to bring down the highest inflation in decades. The interest rate policies of the Fed and other central banks, which also have a strong influence on stock and bond markets, have become a major concern for investors.
On the same day, the European Central Bank announced its big rate hike, Powell told a monetary policy conference hosted by the Cato Institute, a think tank that promotes libertarian ideas, that the Fed would keep rates on hold. high “until the job is done” to bring inflation back to its 2% target.
“There is a record of failed attempts to control inflation, which only increases the ultimate costs to society,” Powell said.
The Fed has already hiked rates four times this year, and markets expect it to deliver another giant-sized hike of three-quarters of a percentage point at its next meeting in two weeks.
Powell “seemed very resolute in the [Fed’s] mission to stifle inflation and, therefore, probably gave more credence to the possibility of a 75 basis point hike at the September meeting,” Stovall said.
One of the Fed’s biggest fears is that households and businesses are starting to expect inflation to stay high over the long term, which could lead them to start buying in a way that creates a vicious circle making inflation even more difficult to shake.
The Fed has been criticized for not taking inflation seriously earlier, and Powell said setting interest rate policy is as much art as science. A big question remains as to whether the high inflation ravaging economies around the world is a one-off event created by the pandemic or the start of something more persistent.
Bond yields rose overall as traders weighed Powell’s remarks and the ECB’s rate hike. The two-year Treasury yield, which tends to track expectations for Fed action, rose to 3.52% from 3.44%. The 10-year Treasury yield, which influences interest rates on mortgages and other loans, rose to 3.32% from 3.27% on Tuesday night.
Healthcare stocks were a big part of S&P 500 gains. Regeneron Pharmaceuticals jumped 18.8% after the company and its partner Bayer reported encouraging study data on an anti-blindness drug.