NEW YORK — Stocks rallied on Friday to complete a successful March and first quarter of the year, performances that looked questionable just a few weeks ago as Wall Street was in turmoil.
The S&P 500 rose 1.4% to cap a 3.5% gain for the month. It also posted a second straight quarter of earnings after falling sharply for most of last year on worries about high interest rates meant to bring inflation under control.
The Dow Jones Industrial Average rose 415 points, or 1.3%, while the Nasdaq Composite rose 1.7%. For the Nasdaq, big jumps in tech stocks led to a quarterly gain of 16.8%, the best since the coronavirus-related crash erupted in spring 2020.
Friday’s gains came after a report showed that inflation in the United States had slowed in February, although it was still high relative to history. A sustained slowdown could give the Federal Reserve more leeway to ease interest rates after raising them at a rapid pace last year.
The threat of higher interest rates has been behind stock market struggles since its peak in early 2022. High interest rates can undercut inflation, but only by outright slowing the entire economy, increasing the risk of a recession. They also drag down the prices of stocks, bonds, and other assets.
A spate of economic reports earlier in the year pointing to persistently high inflation fueled concerns that the Fed might have to hold interest rates longer than feared.
A recession has yet to hit the economy, at least not yet, but pressure from higher interest rates helped the banking industry collapse earlier this month.
The second and third largest US bank failures in history rocked markets after depositors rushed to withdraw their money from Silicon Valley Bank and Signature Bank. The runs prompted investors to scrutinize banks around the world more closely, looking for apparent weak links.
Since then, vigorous action by regulators has helped restore confidence. Almost as importantly, traders have been betting that the problems in the banking system will force the Fed to halt raising rates soon and even start cutting rates later this year.
The prevailing sentiment in the market seems to be that the “Fed will blink and head into April” before waiting to see if a recession or renewed commercial real estate panics or something else awaits them in the second half of the year, according to the investment strategist Michael Hartnett wrote in a report by BofA Global Research.
Expectations of a looser Fed have helped big tech stocks in particular, as high-growth stocks are seen as some of the biggest beneficiaries of lower interest rates. That has helped prop up the S&P 500, where big tech stocks have an outsized role due to their sheer size. Apple, Microsoft and Google’s parent company Alphabet all posted double-digit gains in March.
Strength in the tech space has helped mask weakness in other parts of the market that are still down this month but play a smaller role in indices such as; B. smaller stocks or financial companies.
Some professional Wall Street investors say expectations of rate cuts are premature and could set the market up for disappointment. Cuts can act like steroids for the markets, but they are likely to come only when the economy appears to be in serious trouble.
The Fed, meanwhile, has indicated that it intends to hike rates again before holding them steady this year. Data on Friday suggests that could still be the case, economists said.
“Elevated price pressures, combined with strong job growth restoring incomes and supporting demand, should keep the Fed on track to raise rates further in the coming meetings,” said Rubeela Farooqi, chief US economist at High Frequency Economics.
What makes the Fed’s forthcoming decisions particularly difficult is that the banking industry’s woes could seem like rate hikes alone if they cause banks to pull back on lending. That, in turn, could stifle the hiring and growth of the economy.
All of the drastically shifting expectations of what the Fed will do has meant moves of historic proportions for Treasury yields in the bond market.
The yield on the two-year government bond rose on particularly rattling moves. It was over 5% earlier this month, the highest since 2007, as investors braced for the Fed to keep rates high for longer.
It then quickly plummeted below 3.60% as bets built on Fed easing over banking industry woes. Analysts said the moves were so violent because so many bets had accumulated on the same side: that yields would only go higher.
In the meantime, the return has leveled off somewhat. It fell from 4.12% late Thursday to 4.04% on Friday.
The 10-year yield, which helps set interest rates on mortgages and other major loans, fell to 3.48% from 3.55%. It also fluctuated widely over the quarter, but not as much as the two-year return. At the beginning of the month it was above 4%.
Overall, the S&P 500 rose 58.48 points to 4,109.31 on Friday. The Dow rose 415.12 to 33,274.15 and the Nasdaq rose 208.44 to 12,221.91.
In markets overseas, stocks rose modestly across Europe after a report showed inflation in the 20 countries using the euro currency had fallen to the lowest levels in a year, although food costs were still rising.
Stocks rose slightly in Shanghai after a report said China’s factory activity was stronger than expected in March. They also won in much of the rest of Asia.
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