Shares rose on Wednesday as investors anxiously awaited potentially aggressive action from the Federal Reserve to stem rising inflation.
The Dow Jones Industrial Average rose 130 points, or 0.4%, while the S&P 500 rose 0.8% and Nasdaq Composite rose 1.5%.
The market moves come as investors await a decision on rate hikes from the central bank at the end of its two-day meeting on Wednesday. The market is betting on a greater than 95% chance of a 75 basis point rate hike, the largest increase since 1994, according to the CME Group’s FedWatch tool. (1 basis point equals 0.01%)
The shift to price in a more-than-usual rate hike came after headlines that Fed officials were considering such a move after surprisingly high inflation and a deteriorating economic outlook.
“The headline change from 50 basis points to 75 basis points reflects a grim reality, but it also reflects the Fed’s determination to underline its commitment to its mandate to maintain price stability,” said Quincy Krosby, chief equity strategist at LPL Financial. “It’s not a test balloon or a lead balloon — it’s reality.”
Communications services and consumer goods led the rally, gaining about 2% as technology stocks Tesla, Amazon, Apple and Alphabet soared. Financials also posted a 1.6% recovery, while shares of Boeing, Goldman Sachs and Cisco lifted the Dow.
The beat-up travel names also recovered, with cruise shares Carnival and Norwegian Cruise Line rising about 3% and 4%, respectively. Shares of airlines, including Delta and United, also rose about 4% each.
Wednesday’s early moves likely indicate investors are buying after the recent selloff and hoping for more certainty from the Fed, said Adam Sarhan, CEO of 50 Park Investment.
“The stronger the Fed can be on raising rates, the more likely the market will recover,” he said. “In other words, if the Fed comes up with 50 basis points or 25 basis points, it won’t appease the market. The market wants to see final action. The market wants certainty, the market wants clarity and the market wants to know that the Fed is in control of can regain the story.”
Fed Chair Jerome Powell will hold a news conference at 2:30 p.m. ET following the central bank’s policy decision. Investors will be watching his language and tone on the Fed’s further tightening trajectory. The central bank will also announce its outlook for its benchmark interest rate, inflation and GDP.
Some notable investors, including Bill Ackman of Pershing Square, believe the central bank can regain its credibility by acting aggressively to show it is serious about inflation.
The Fed “raises 75 bps, expresses deep concern about inflation and inflation expectations, and makes it clear that nothing is off the table for July, including 100 bps or more if necessary,” he tweeted Wednesday as his “forecast”. ahead of the Fed decision.
Treasury yields, which have risen dramatically this week in anticipation of the major rate hike, retreated on Wednesday. The 2-year yield, which is the most sensitive to changes in monetary policy, rose 40 basis points this week alone to reach its highest level since 2007. since April 2011.
Meanwhile, some traders expect more pain for the markets.
“We think risky assets should still be adjusted lower and remain solidly risk-free in our tactical asset allocation,” wrote Max Kettner of HSBC Global Research. “The very recent market obsession around a bear market rally seems to be something of a fad now,” he added.
Wednesday’s moves came after the S&P 500 suffered a five-day losing streak and plunged further into bear market territory on Tuesday. The index has already fallen more than 3% this week and is now almost 22% lower than its record at the beginning of January. The blue-chip Dow slipped about 150 points on Tuesday and also fell for the fifth day in a row on Tuesday. The Nasdaq Composite ended slightly higher on Tuesday.
“While all eyes will be on the Fed this afternoon, we expect the next phase of the current bear market to be driven by mounting recession risks and a downward cycle of earnings revisions,” wrote Wolfe Research’s Chris Senyek.