Closing Market Update Stocks Rebound from CPI-Driven Nosedive
schwab.com
Major indexes recovered part of the previous day's sell-off as investors grappled with renewed inflation concerns.
(Wednesday market close) The S&P 500® index (SPX) posted its first gain in three days on Wednesday as U.S. stocks recovered some of the previous day's sharp downturn, which was sparked after hotter-than-expected Consumer Price Index (CPI) numbers rekindled inflation worries.
Buyers remerged across most sectors of the market as investors grappled with the CPI report's implications on Federal Reserve interest rate policy and digested another heavy serving of quarterly earnings. The market's rebound gained a boost from two major ride-hailing companies, Lyft (LYFT) and Uber (UBER). Lyft soared 35% after reporting stronger-than-expected results, while Uber jumped 15% after announcing a $7 billion share buyback.
Investors also await Thursday's January Retail Sales report and Friday's Producer Price Index (PPI) results.
"The markets are trying to figure out if Tuesday’s CPI report was a 'one-off' event or the beginning of a trend" marked by inflation pressures perking up again, said Kevin Hincks, Host of Schwab Network's "Fast Market." Wednesday's close "will be very important" in terms of whether the market can regain upside momentum.
Hincks pointed to some potentially bearish indicators for equities, including a recent climb in crude oil prices and elevated short-term Treasury yields, among a few factors that clash with an easing-inflation narrative. Earlier Tuesday, the 2-year yield touched a seven-week high around 4.67%, suggesting traders see little chance of any near-term Fed rate cuts.
Here's where the major benchmarks ended:
- The S&P 500 index rose 47.45 points (1.0%) to 5,000.62; the Dow Jones Industrial Average® (DJI) gained 151.52 points (0.4%) to 38,424.27; the Nasdaq Composite® (COMP) added 203.55 points (1.3%) to 15,859.15.
- The 10-year Treasury note yield (TNX) fell almost 5 basis points to 4.269%.
- The Cboe Volatility Index® (VIX) fell 1.47 to 14.38.
Small-cap shares were among the upside leaders Wednesday as the Russell 2000® Index (RUT) surged 2.4% to erase over half of its 4% nosedive on Tuesday. Banks and semiconductors were also among the strongest sectors. Energy companies were under pressure after WTI crude oil (/CL) futures dropped 1.6% in the wake of a larger-than-expected increase in U.S. inventories.
Stocks on the move
The following companies had stock price moves driven by analyst ratings, quarterly results, or other news:
- Airbnb (ABNB) dropped 1.7% despite reporting a narrower quarterly loss and stronger-than-expected revenue.
- Akamai Technologies (AKAM) fell 8.2% after the cloud and server network company's fourth-quarter revenue missed analysts' forecasts.
- GoDaddy (GDDY) declined 1.3% after the web hosting company's full-year revenue guidance came out at the low end of Wall Street expectations.
- Kraft Heinz (KHC) shed 5.5% after the food company's fourth-quarter revenue of $6.86 billion fell short of expectations.
- MGM Resorts International (MGM) tumbled 6.3% after weakness in the company's U.S. casino business overshadowed stronger-than-expected quarterly results.
- Topgolf Callaway Brands (MODG) surged almost 12% after the golf equipment maker reported a smaller-than-expected quarterly loss and higher-than-expected revenue.
- Zillow Group (Z) jumped almost 8% after the real estate platform's earnings topped expectations.
Companies expected to report results Thursday include Applied Materials (AMAT), which provides manufacturing equipment and services to semiconductor makers. Applied Materials shares touched a record above $188 on Monday and have gained nearly 15% so far this year, outpacing the 5.8% increase in the Nasdaq-100® (NDX) behind AI-driven bullishness fueling the chip industry.
Other major companies expected to report results Thursday include farm equipment manufacturer Deere (DE), food delivery service DoorDash (DASH), sports gambling platform DraftKings (DKNG), and vehicle maker Stellantis (STLA).
Inflation still above Fed target
Tuesday's CPI report shook investors who for the past year watched key inflation readings steadily decline, boosting confidence that the Fed's aggressive rate hikes, launched almost two years ago, were successfully bringing price pressures under control.
Last year's rally in stocks, which carried into 2024, was predicated in part on beliefs that with inflation apparently falling closer to the Fed's 2% long-term target, the central bank was near a policy "pivot" that would result in several rate cuts this year.
But the CPI report, combined with a strong January jobs report, has prompted investors to sharply curtail rate cut expectations. Market indicators suggest an initial Fed cut may happen in June at the earliest. By contrast, at the beginning of the year, traders placed relatively high odds on a cut in March.
Last week, Fed Chairman Jerome Powell said the central bank needed more evidence that inflation is on a sustained path toward the 2% target before cutting rates, Schwab Center for Financial Research analysts said in a report. According to Tuesday's report, core annual CPI, at 3.9% in January, was still running nearly double the Fed's target.
"The Fed now looks prophetic in pushing back market hopes for a March rate cut," Schwab analysts said. Treasury yields eased Wednesday but remain near two-month highs, which may limit stock market gains. The CPI report "sent market volatility dramatically higher," Schwab analysts added, "meaning investors should be on the lookout for sharper swings in trading than they'd grown used to earlier this year."
Late Wednesday, traders priced nearly 90% odds the fund target will remain unchanged at 5.25% to 5.5% following the March FOMC meeting, according to the CME FedWatch Tool. The tool shows a 62% chance the fed funds rate will be unchanged after the FOMC's May meeting, up from 36% a week ago.
Thursday's Retail Sales report for January will offer insight into the financial health of consumers, who spent at a robust pace last year but may have since pulled back.
Analysts expect overall sales to have declined 0.2% in January from December, in part a reflection of severe winter weather in parts of the country. In December, sales posted a monthly gain of 0.6%. Excluding autos, January sales are expected to have risen 0.1%.
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