U.S. stocks turned sharply higher Thursday, a head-spinning reversal after major indexes spent much of the morning deep in negative territory.
Stocks tumbled in early trading after new data showed that inflation remains persistently high, strengthening expectations for continued large interest-rate increases from the Federal Reserve. At their lows, the Nasdaq Composite had fallen more than 3%, the S&P 500 had dropped more than 2%, and the Dow Jones Industrial Average had declined nearly 2%, according to Dow Jones Market Data.
The morning’s declines followed what had been a dismal stretch for stocks. The S&P 500 on Wednesday fell for the sixth day in a row, hitting its lowest closing level since November 2020.
Traders appeared to decide that the selling had gone too far. Stocks pared their losses throughout the morning, then turned green shortly after 11 a.m. The S&P 500 recently was up 2.8% while the Dow industrials were up about 3%, or about 900 points. The Nasdaq Composite advanced 2.3%.
“What the market is experiencing is the influences of a lot of short-term traders,” said Tom Galvin, chief investment officer at wealth management firm City National Rochdale. While some traders dumped stocks after the inflation data, “once they were done selling, I think markets started to stabilize.”
The turn higher came as a relief after another punishing span in the markets.
The Nasdaq Composite, like the S&P 500, closed lower on Wednesday for a sixth consecutive trading day. On Tuesday those losses tipped the tech-heavy equities gauge into a bear market—Wall Street parlance for a decline of 20% or more from a recent peak—for the second time this year.
Still, such heart-stopping moves—sharp gains as well as steep drops—can be a sign of trouble. Markets were rocked by similar gyrations as they tumbled early in the pandemic.
Investors have been fixated on any signals about the path of inflation and the trajectory of the Federal Reserve’s campaign to tame the price increases by raising interest rates. Rising rates put pressure on the valuations that investors are willing to pay for stocks, while also raising concerns about companies’ future earnings.
Earlier Thursday, new data from the Labor Department showed that a reading of U.S. consumer inflation excluding volatile energy and food prices accelerated to a new four-decade high. The so-called core measure of the consumer-price index gained 6.6% in September from a year earlier, the biggest increase since August 1982.
The overall consumer-price index, meanwhile, increased 8.2% in September from the same month a year ago, down from 8.3% in August and 9.1% in June.
That move lower could be welcome news for investors looking to justify buying back into a stock market that is trading much more cheaply than in the recent past.
“The fact that you’re seeing some peaking out in inflation to where maybe we just don’t have to fight the Fed so much, people will feel comfortable buying in at these levels,” said Dan Genter, chief executive and chief investment officer at Genter Capital Management.
Investors have debated whether signs of stress creeping into some markets might cause the Fed to slow its pace of interest-rate increases. Volatility in U.K. government-bond markets, following government plans for large, debt-funded tax cuts, has sparked margin calls for pension funds and rippled into U.S. junk-debt markets.
Mortgage rates hit a 20-year high on Thursday, a development that is likely to add to the pressure on the cooling housing market, potentially accelerating the shakeout of this cyclical industry.
Federal Reserve officials expressed concern at their meeting last month over the persistence of high inflation. They revised higher their expectations for rate increases, though some signaled caution about overdoing them amid risks of economic and financial volatility. The International Monetary Fund has warned that global central banks’ moves to quickly raise interest rates have fueled increased risks to the financial system.
“Market volatility and financial stability is something we’re following closely,” said
Carsten Brzeski,
ING Groep’s
global head of macro research, adding that the fast rise in interest rates “is clearly a potential risk.”
Additional data from the Labor Department showed that 228,000 Americans applied for unemployment benefits in the week ended Oct. 8, up from 219,000 the week prior.
In bond markets, the yield on the benchmark 10-year U.S. Treasury note rose to 3.939% from 3.901% Wednesday, reversing earlier losses ahead of the inflation data. Yields and prices move inversely.
In energy markets, Brent crude, the international benchmark for oil prices, rose 2.3% to $94.57 a barrel.
Overseas, the pan-continental Stoxx Europe 600 rose 0.8%.
Traders worked on the floor of the New York Stock Exchange last week.
Photo:
BRENDAN MCDERMID/REUTERS
In Asia, major indexes closed with losses. Hong Kong’s Hang Seng fell 1.9% and South Korea’s Kospi declined 1.8%. Japan’s Nikkei 225 and China’s Shanghai Composite edged down 0.6% and 0.3%, respectively.
Write to Caitlin Ostroff at caitlin.ostroff@wsj.com and Karen Langley at karen.langley@wsj.com
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