Dow, S&P 500 end second straight day higher as investors take inflation near 40-year high in stride

Dow, S&P 500 end second straight day higher as investors take inflation near 40-year high in stride

U.S. stock indexes were flat to modestly higher Wednesday afternoon, despite starting out on a stronger note, after a reading on inflation came in near a four-decade high.

What’s happening
  • The Dow Jones Industrial Average

    was down 20 points, or less than 0.1%, near 36,233.

  • The S&P 500

    added 9 points, or 0.2%, to 4,722.

  • The Nasdaq Composite Index

    rose 35 points, or 0.2%, to 15189.

On Tuesday, all three indexes gained ground, with the Nasdaq Composite leading the way with a gain of 1.4%.

What’s driving markets

Stocks were buoyed Wednesday as investors exhaled with relief after the latest reading on inflation, while running hot, indicated it isn’t worse than anticipated.

The consumer-price index showed inflation with a monthly rise of 0.5% in December, as prices rose by a near 40-year high of 7% from a year ago, while also indicating elevated U.S. inflation could persist well into 2022.

The gain in the consumer-price index exceeded the 0.4% forecast of economists polled by The Wall Street Journal. Increases were driven largely by elevated costs for food, shelter and used cars, even as energy prices briefly fell from recent highs.

A separate measure of consumer inflation that strips out volatile food and energy prices rose 0.6% last month, the government said Wednesday. That pushed the increase over the past 12 months to 5.5% from 4.9%—a 31-year high.

While stocks were off the session’s best levels, Kent Engelke, chief economic strategist at Capitol Securities Management, said the market was showing signs of relief that inflation pressures didn’t overshoot expectations.

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“Now the next test is will inflation pressure actually moderate,” Engelke said, in a phone interview. “I do believe it will, but I don’t think it will back off the 2% target range the market is expecting.”

“We still will have above-trend growth and above-trend inflation,” he predicted, adding that such a mix could reignite the recent sharp rotation by investors into value stocks, but away from growth.

Worries about runaway prices, and the Fed’s response, have helped the S&P 500/Citigroup pure value index

rise 5.5% this year as the S&P 500/Citigroup pure growth index

has retreated 5.1%.

However, climbing oil prices potentially could still add to consumer woes. “Since year-end, oil prices have jumped nearly 10%, with WTI currently sitting at $82 per barrel, suggesting that inflationary pressures from energy are likely to re-emerge,” Steve Chiavarone, Federated Hermes’ head of multiasset solutions, wrote in emailed comments Wednesday.

Investors now also are eager for a blueprint from the Federal Reserve on how it plans on reducing its balance sheet, including potentially selling assets, a tool Chairman Jerome Powell didn’t rule out Tuesday, in his confirmation hearing for a second term at the helm of the central bank.

Cleveland Fed President Loretta Mester on Wednesday said she backs the central bank shrinking its balance sheet “as fast as we can,” so long as the pace doesn’t hurt financial markets.

Still, if the Fed starts selling Treasurys and mortgage-backed securities, instead of letting them mature and roll off the balance sheet, it would mark “a major change in the past 10-12 years of monetary policy,” Engelke said.

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“What’s going to happen if your biggest bond buyer now becomes a seller?”

Read: As Wall Street watches yields climb, a big question emerges: What is the ‘right size’ for the Federal Reserve’s balance sheet?

“Equity investors will need to prepare for choppy markets as the Fed pivots to deal with stickier inflation than they previously anticipated,” Matt Peron, director of research at Janus Henderson Investors, wrote in a Wednesday note.

“This is consistent with our view that the first few months of the year will be volatile as markets adjust, but then should set up a better outlook as the Fed completes its pivot and some traction is seen on the inflation front.”

Which other companies are in focus?
  • Jefferies Inc. JEF said Wednesday its fourth-quarter net income rose 6% to $324.9 million, or $1.20 a share, from $307.3 million, or $1.11 a share in the year-ago quarter. Shares fell 9.5%.

  • Shares of Pfizer Inc. PFE were down 0.4% after the company said administering the Prevnar 20 pneumococcal disease shot at the same time as the COVID-19 vaccine and booster it developed with BioNTech SE BNTX produced the same response.

  • Shares of Intuitive Surgical IncISRG fell 1.5%, after the minimally invasive care company provided an upbeat fourth-quarter revenue outlook, amid strength in its instruments and accessories business and as the COVID-19 resurgence hurt results.

  • Popular Inc. BPOP said Wednesday it expects to repurchase $500 million worth of its stock in 2022, and that it raised its quarterly dividend by 22%, to 55 cents a share from 45 cents. Its stock was up 0.4%.

  • DirecTV and Dish Network

    are in fresh talks to merge after years of on-again, off-again wrangling and multiple clampdowns from federal antitrust officials, the New York Post reported. Shares of Dish were up 4%.

  • Shares of Tesla Inc.

    were in focus, up 4%, after a teenager, calling himself a 19-year-old security specialist and hacker, said that he had hacked into the software systems of nearly two dozen Tesla electric-powered vehicles and had limited control over them.

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How are other assets faring?
  • The yield on the 10-year Treasury note

    fell 2 basis points to 1.73%. Treasury yields and prices move in opposite directions.

  • The ICE U.S. Dollar Index DXY, a measure of the currency against a basket of six major rivals, was down 0.7%.

  • Oil futures extended gains on Wednesday, with West Texas Intermediate crude CL00 for February delivery CLG22 rising 1.8% to settle at $82.64 a barrel. Gold futures GC00 edged up 0.5% ending at $1,827.30 an ounce.

  • Bitcoin BTCUSD was up nearly 2.4% at $43,810.

  • The Stoxx Europe 600 SXXP closed up 0.7%, while London’s FTSE 100 UKX gained 0.8%.

  • The Shanghai Composite SHCOMP rose 0.8%, while the Hang Seng Index HSI closed 2.8% higher and Japan’s Nikkei 225 NIK rallied 1.9%.

Steve Goldstein contributed to this article.

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