Wall Street rollercoaster: Dow erases 500 point loss, surges into huge gain

Wall Street stocks fluctuated wildly on Thursday, wiping out the precipitous early losses caused by grim inflation numbers in the latest series of rollercoaster moves to rock financial markets.

The Dow Jones Industrial average ended the day at 827.87 points, or 2.8 percent, after previously falling more than 500 points, marking the largest one-day turnaround in years.

The S&P 500 closed 2.6 percent higher and the Nasdaq gained 2.2 percent in a whiplash reversal from their sharp sell-off at the opening bell. Other markets around the world also went from losses to gains strongly.

The financial and energy sectors led the day’s gains as crude oil prices rose and major banks prepared to kick off the third-quarter earnings season on Friday with reports.

In addition to equities, prices for bonds and cryptocurrencies initially fell immediately after the US government released its report showing that inflation is spreading more widely across the economy.

Core inflation, a component closely monitored by policymakers and investors, accelerated to a 40-year high in Thursday’s inflation report.

That forced investors to brace for continued, large rate hikes by the Federal Reserve to bring inflation under control, and the potential recession those moves could trigger.

The Dow fell a whopping 549 points shortly after the report was published, and the Nasdaq fell a whopping 3.2 percent.

But stocks quickly reversed and rose, confusing many market observers who warned the rally could be temporary.

“Anyone hoping for a pivot, a pause, or a slowdown in Fed tightening before the next meeting has hit the ground running today,” said Liz Young, chief investment strategist at SoFi. “I literally can’t get my head around what the logic would be to buy (stocks) with any change in Fed policy.”

Equities in Europe also fell on losses caused by US inflation data, while government bond yields eased slightly from their initial rise. The value of the US dollar against other currencies fell after initial jumps.

It’s the latest erratic, back-and-forth moves for markets, fluctuating wildly because of all the uncertainties about economies around the world and how severely higher interest rates will hurt them.

Analysts could only speculate about what changed the markets.

“Hopefully it’s because people have dug into the details of the inflation report and noticed some signs that we could get inflation relief by the end of the year,” said Brian Jacobsen, senior investment strategist at Allspring Global Investments.

“Markets have talked themselves off a ledge, so to speak, and they’re a little more hopeful,” said Kristina Hooper, chief global markets strategist at Invesco.

Young noted that the dollar’s decline against other currencies, such as the British pound, could be a tailwind for equities, but not enough to trigger such a sharp reversal in the market.

“It makes no sense to me that the market would rise so much,” she said.

Most investors came early in the morning expecting the Fed to raise its key overnight interest rate by three-quarters of a percentage point next month, which would be the fourth rise in a row that was three times the usual rate.

But Thursday’s disappointing numbers led many investors to expect a fifth of such gains in December, raising hopes that the Fed could begin to downshift soon.

Bets rose for the Fed to push the overnight interest rate above 5 percent early next year. It started at virtually zero this year.

Higher rates make buying a house, car or anything else bought on credit more expensive, and the hope is that this will slow the economy and the job market enough to undermine inflation.

But it takes notoriously long for higher interest rates to take full effect, and the Fed’s risks lead to a sharp downturn and significant job losses if it goes too far.

However, as the trading day progressed and investors had more time to dig into the details of the inflation report, analysts said they may see a glimmer of hope.

While so-called “core” inflation accelerated last month, overall inflation, including food and energy prices, slowed a little.

“If you at least start to see the CPI headline cool, there’s hope the core CPI will follow,” Hooper said. “That thought process definitely kicks in.”

Treasury yields retreated somewhat from their early morning jumps, easing pressure on equities.

The yield on the 10-year Treasury, which helps determine the rates for mortgages and many other loans, rose to 3.93 percent from 3.90 percent at the end of Wednesday. Earlier in the day it was still above 4 percent.

The two-year yield, which depends more on expectations for action from the Fed, rose from 4.29 percent to 4.43 percent. It rose above 4.50 percent earlier in the morning.

Higher interest rates add to the pressure on the economy, not only by making loans more expensive and slowing growth.

They also drag down prices for stocks, cryptocurrencies and almost every other investment because they mean bonds pay more interest, which takes some dollars away from other investments.

Investments seen as the riskiest, the most expensive, or forcing investors to wait the longest for major growth have been hit hardest by the rise in interest rates this year.

The inflation report hit Wall Street just as companies geared up to report how much profit they made over the summer.

If they could report strong growth, it would be a major support for stock prices, even as concerns about higher-for-longer interest rates rise in the markets.

But analysts have highlighted the pressures caused by high inflation, high interest rates and the rising value of the US dollar against other currencies, diluting the dollar value of sales abroad.

“The earnings season may not be bad,” said Yung-Yu Ma, chief investment strategist at BMO Wealth Management, “but being strong enough to turn this tide will be difficult.”

Domino’s Pizza jumped 10 percent for biggest gain in the S&P 500 after the earnings report. Earnings for the last quarter fell short of analysts’ expectations, but made more sales than forecast.