Rally builds after $2 trillion wipeout; yields up

U.S. markets staged a relief rally Tuesday as investors tried to look past the rising recession fears that sparked fierce volatility last week, but persistent inflation and a recent jump in interest rates have made it hard to take a breath.

The stock market, which was closed Monday in observance of Juneteenth, is coming off its worst week since March 2020.

The S&P 500 sank into a bear market, defined as a 20% drop from a recent high, and gave up 5.8% over the five-day span as investors digested the Federal Reserve’s decision to raise its benchmark interest rate by three-quarters of a percentage point, as well as mounting evidence that consumers are cutting back and growth is slowing amid the highest inflation in 40 years.

But investors bounced back to start the trading week. The Dow Jones industrial average advanced 641 points, or 2.2% at the closing bell.

And both the S&P 500 and the tech-heavy Nasdaq climbed about 2.5% to end the spirited trading session.

Despite the winning day, however, the major economic factors that have pummeled Wall Street this year remain a daunting obstacle for the next comeback.

“The early market gains are more about the oversold conditions created over the last couple of weeks rather than investor optimism related to an improving economy,” said Wayne Wicker, chief investment officer at MissionSquare Retirement.

“Longer-term investors will be looking to second-quarter earnings announcements next month to determine the impact that inflation may be having on margins.”

The earning calls will be the first test of corporate performance after the Fed rate hike.

Despite Tuesday’s rally, sentiment is unlikely to change long term as the Fed attempts to control rising inflation.

If earnings slow down in the macroeconomics environment, investors will likely become more cautious about their allocations, Wicker said.

Investors are trying to adjust to the tightening environment, which has largely wiped out the gains that stocks made after the sharp downturn at the pandemic’s onset.

Later this week, Fed Chair Jerome Powell will testify before Congress regarding the recent interest rate hike - the central bank’s biggest since 1994 – and his views of the economy.

“We now see recession risk as higher and more front-loaded,” Goldman Sachs chief economist Jan Hatzius cautioned in commentary Tuesday, adding that the bank is “increasingly concerned” that the Federal Reserve will “feel compelled to respond forcefully to high headline inflation and consumer inflation expectations if energy prices rise further.”

Gas prices have inched down from record highs in recent days, and the national average for a gallon of gas now stands at $4.96, according to data tracked by AAA.

But in some parts of the country, the average remains above $6 per gallon.

President Joe Biden is preparing for a trip to Saudi Arabia next month, where he is expected to ask the oil-rich nation for help in bringing down pressure in energy markets. Brent crude, the international oil benchmark, was trading above $115 per barrel Tuesday.

West Texas Intermediate crude, the U.S. oil benchmark, was trading around $111 per barrel.

Inflation is heaping pressure upon companies and households across all rungs of the economy, leaving businesses with excess inventory and forcing consumers - whose spending powers 70% of the U.S. economy - to cut back.

Layoffs at tech companies have spiked to levels not seen since the early days of the pandemic, and cracks have been forming in the housing market: Existing-home sales slumped 3.4% in May amid soaring mortgage rates and home prices, according to fresh data from the National Association of Realtors. That’s down 8.6% compared with May 2021.

The sales slide is expected to continue in the coming months as the borrowing environment gets tougher. In fact, inventories rose year-over-year for the first time since 2019.

“The housing market is cooling after running red hot in 2020 and 2021,” Bill Adams, chief economist for Comerica Bank, said in commentary Tuesday. “Fundamental demand for housing is higher than pre-pandemic because of the rise of remote work and changes in lifestyles, but tighter monetary policy is a big head wind to the housing market.”

Overseas markets also climbed Tuesday. Japan’s Nikkei 225 and Hong Kong’s Hang Seng both closed 1.8% higher after losses last week.

In Europe, markets closed higher across the board, with the benchmark Stoxx 600 index edging up 0.4%.

After recent selloffs in U.S. government bonds, the 10-year U.S. Treasury yield saw some recovery Tuesday, edging up 0.066 to 3.305%. Bond yields move inversely to prices.

Kellogg’s shares climbed nearly 2% after the 116-year-old packaged foods giant announced it would split into three companies: one for cereal, one for snacks and one for plant-based foods.

Bitcoin crept back above $21,000 Tuesday after dropping below the $18,000 threshold over the weekend, the first time it had fallen below $20,000 since 2020.

It has suffered a precipitous slide in recent months as inflation and other rising threats to growth pushed investors away from riskier investments.

The most popular cryptocurrency has shed more than 70% of its value since its November high of $68,990.