Rosalind Evans
Wall Street sees promising, as multiple reports indicate a more robust economy than initially anticipated.
The S&P 500 experienced an afternoon surge of 0.7%, despite a general downward trend following a five-week rally that peaked in mid-June, recording the highest level over a year.
The Dow Jones Industrial Average rose by 147 points, or 0.4%, to 33,864, and the Nasdaq composite was up by 1.1%.
A significant contributor to the upward movement is airlines, following a statement from Delta Air Lines about substantial latent demand, particularly from high-income customers, who represent three-quarters of air travel spending. Despite significant inflation, these consumers remain financially secure.
Following its optimistic earnings forecast for the year, Delta’s stock increased by 4.9%. American Airlines and United Airlines also saw increases of 5.7% and 5.4% respectively.
However, not all companies are weathering the high inflation as well. Walgreens Boots Alliance shares plummeted 9.5% after announcing lower-than-expected profits for the latest quarter. The company also downgraded its fiscal year earnings forecast, attributing the revision to customers’ cautious spending habits due to inflation.
Lordstown Motors suffered a 36.3% drop after declaring Chapter 11 bankruptcy. The electric pickup truck company had previously alerted in May to the possibility of default following an unstable $170 million investment plan with Foxconn.
Despite higher interest rates to curb inflation, the U.S. stock market has been thriving this year, aided by the economy’s successful avoidance of a recession so far. Nevertheless, many investors merely defer their recession predictions rather than eliminate them.
Recent data is diverse, with the resilient job market counterbalancing the weakening manufacturing sector and other economic components.
Tuesday’s reports were generally more positive than anticipated, with consumer confidence, new home sales, and durable goods orders exceeding economists’ forecasts.
Though manufacturing activity contracted in the Richmond, Virginia region, the downturn was less severe than expected, which may influence decisions by the Federal Reserve and other central banks regarding further interest rate hikes.
The European Central Bank’s President Christine Lagarde warned about a slow inflation decline and pledged to increase rates “to break this persistence.” She signalled a near-certain rate hike in July.
A similar expectation applies to the Federal Reserve, although Wall Street hopes that the next month’s hike could be the Fed’s last, despite its hint at potentially two more rate hikes this year.
Traders are largely dismissing earlier predictions of multiple interest rate cuts in 2023.
A senior international economist at Vanguard, Andrew Patterson, says, “We believe central banks have more work to do. We’ve always said inflation wouldn’t come down magically, even as post-pandemic supply chain issues were resolved.”
In other markets, Shanghai stocks climbed 1.2% after Premier Li Qiang, China’s second leader, declared an acceleration in economic growth towards this year’s 5% target. Hong Kong stocks also enjoyed a 1.9% boost, while other Asian and European markets showed a more subdued performance.
The 10-year U.S. Treasury yield in the bond market increased from 3.72% to 3.76%, affecting mortgage rates and other crucial loans. The two-year Treasury yield, more sensitive to Fed expectations, also rose slightly from 4.74% to 4.75%.
While Wall Street rejoices in today’s positive turn, the future remains unpredictable due to concerns about inflation, central banks’ decisions on interest rates, and ongoing global supply chain issues. However, strong consumer confidence, robust home sales, and durable goods orders suggest the economy can hold its ground despite these challenges. Today’s resilience in the stock market serves as a testament to the economy’s ability to adapt and flourish even in uncertain times.
