Stocks Gain for Second Month in a Row; Dow Exits Bear Market


Stocks rallied Wednesday after Federal Reserve Chair

Jerome Powell

signaled a potential slowdown in interest-rate increases, powering the Dow Jones Industrial Average more than 700 points higher and into a new bull market.

The S&P 500 and Nasdaq Composite jumped 3.1% and 4.4%, respectively, and all three indexes ended November with a second consecutive month of gains.

Still, the rally wasn’t enough to undo the damage inflicted earlier in the year as rapidly rising interest rates battered stocks. The S&P 500 is down 14% in 2022 and remains on track for its worst year since 2008. The tech-heavy Nasdaq Composite, whose members tend to be especially sensitive to changing rates, has slumped 27%.

The Fed’s aggressive campaign against sky-high inflation has punished stocks. Higher rates give investors more options to earn a return outside the stock market and ding the worth of companies’ future earnings in commonly used valuation models.

“It’s been a pretty one-dimensional year,” said

Matt Orton,

chief market strategist at Raymond James Investment Management. “The persistence of inflation has dominated everything else.”

Major indexes pared their losses in recent weeks, boosted by a slowdown in inflation and hopes that the Fed would slow its campaign of rate increases starting in December.

That optimism was bolstered Wednesday when Mr. Powell indicated in a speech that the central bank is on track to raise rates by a half percentage point at its December meeting. That would mark a downshift after a series of four 0.75-point rate rises.

Stocks rallied as Mr. Powell spoke and built on their gains through the afternoon.

The S&P 500 rose 122.48 points, or 3.1%, to 4080.11. The Dow Jones Industrial Average added 737.24 points, or 2.2%, to 34589.77. The Nasdaq Composite advanced 484.22 points, or 4.4%, to 11468.00.

“Today’s speech gives more hope for the possibility of that elusive soft landing,” said

Hank Smith,

head of investment strategy at Haverford Trust. “From the market’s perspective, there’s the chance of a soft landing as opposed to a hard landing that’s a traditional recession.”

The Dow has risen more than 20% since Sept. 30, its low point of the year. That puts it back in a bull market, which is defined as an increase of 20% or more from a recent low. The S&P and Nasdaq remain in bear markets.

The gain since Sept. 30 also marks the Dow’s largest two-month percentage gain since July 1938, measured by calendar months, according to Dow Jones Market Data.

In 2021, officials thought that high inflation would be temporary. But a year later, it was still near a four-decade high. WSJ’s Jon Hilsenrath explains three factors that have kept inflation up for longer than expected. Illustration: Jacob Reynolds

Investors will closely watch inflation data due to be published Dec. 13 for further clues about the path of interest rates.

“Operation catch-up is what this year has been all about, and I think it’s over,” said

Hani Redha,

portfolio manager at PineBridge Investments. “They’ve caught up. They’re in a decent place,” he said of the Fed.

Still, Mr. Redha said Mr. Powell could be seeking to push back at expectations of a looming pivot toward easier monetary policy.

Mr. Redha said stocks are likely to come back under pressure in early 2023. The Fed, he said, will continue to tighten monetary policy through its bondholdings even if it stops raising interest rates, while a recession will hurt earnings.

Money managers also are eying corporate earnings as a potential drag on stocks in the months to come. Analysts are forecasting profits from S&P 500 companies will rise more than 5% next year, according to FactSet. But many investors think those projections are unrealistic.

“Earnings estimates are too high for 2023,” said

Niladri Mukherjee,

head of CIO portfolio strategy for Merrill and Bank of America Private Bank. “They need to come down.”

The S&P 500 index remains in a bear market.



Photo:

BRENDAN MCDERMID/REUTERS

Government bond prices have risen since data published Nov. 10 showed inflation slowed in October, sparking hopes the Fed would ease off the brakes.

The yield on the benchmark 10-year U.S. Treasury note declined to 3.699% Wednesday, from 3.746% Tuesday. It is down from more than 4% at the start of the month, notching its largest one-month decline since March 2020.

Yields on longer-term U.S. Treasurys have fallen far below those on short-term bonds, a sign that investors think the Fed is close to winning its inflation battle—and that the economy is heading toward recession.

Global markets broadly rose Wednesday, with the Stoxx Europe 600 up 0.6%. China’s Shanghai Composite Index added about 0.1%. The Hang Seng rose 2.2%, closing out the biggest one-month advance for the Hong Kong benchmark since 1998.

Oil benchmark Brent crude rose 2.9% to $85.43 a barrel. Traders are awaiting details of the price cap that the U.S. and its allies are due to impose on Russian oil next week. The level of the cap is still under negotiation in the European Union.

Write to Karen Langley at karen.langley@wsj.com and Joe Wallace at joe.wallace@wsj.com

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