S&P 500 closes at record as investors brush off highest inflation since 2008

© Alain Jocard/Agence France-Presse/Getty Images

MARKET SNAPSHOT

© Alain Jocard/Agence France-Presse/Getty Images Inflation in focus.

U.S. stock benchmarks closed up across the board on Thursday, with the S&P 500 logging a record finish, after investors discounted the latest evidence of accelerating inflation.

The climb in stocks and a fall in U.S. bond yields implied that investors agree with the Federal Reserve’s argument that the jump in prices is transitory and is caused by the short-term impact of demand exceeding supply as the economy recovers from the coronavirus pandemic.

What did the major benchmarks do?

  • The Dow Jones Industrial Average closed almost flat, up 19.10 points or 0.06% at 34,466.24
  • The S&P 500 advanced 19.63 points or 0.5%, to finish at 4,239.18, exceedign the past record of 4,232.60 set on May 7.
  • The Nasdaq Composite Index gained 108.58 points or 0.8%, ending at 14,020.33.

What drove the market?

The consumer-price index jumped 0.6% last month to mark the fourth increase in a row, the government said Thursday. Economists polled by Dow Jones and The Wall Street Journal had forecast a 0.5% advance.

The rate of inflation over the past year escalated a 13-year high of 5% from 4.2% in the prior month. That put it at the highest level since 2008, when the cost of oil hit a record $150 a barrel. Before that, the last time inflation was as high was in 1991.

Still, some investors argued that higher inflation is likely to be a short-lived phenomenon, resulting from so-called base effects. That refers to the comparison with price levels a year ago that were depressed due to the pandemic.

Mike Loewengart, managing director investment management at E-Trade Financial, said that there is a lot of latent consumer demand being released after months of COVID-related lockdowns.

“Keep in mind that as we start to make our way back to a full economic recovery, there is pent-up demand and supply constraints from raw material and labor shortages,” the strategist wrote. “This creates the type of inflation that the Fed believes is transitory, meaning it too shall pass,” he added.

Not all investors were sold on the notion of a transitory bout of inflation.

James Knight, ING’s chief international economist, told MarketWatch that “we are at or close to the peak,” on inflation, but also said “we think the descent will be far slower and gradual than the Fed are currently anticipating based on their forecasts.”

“Headline inflation is likely to stay above 4% until early next year with core inflation likely remaining above 3%,” until the second quarter of next year. “That doesn’t strike me as especially transitory,” the economist said. 

Lately, stocks had been locked mostly in narrow range near all-time highs, as investors try to gather more insight about the outlook for the economy in the aftermath of the public health crisis that hobbled the global economy.

Read: Why stock traders say, ‘never short a dull market’

“U.S. stocks rallied to a fresh record high after investors realized the punchbowl of stimulus is not going away anytime soon,” said Edward Moya, senior market analyst for the Americas, at OANDA. “Given the distortion in the labor market, investors are ignoring this data series.”

The yield on the 10-year Treasury note on Thursday was trading around its lowest level since March, suggesting that fixed-income investors are buying into the possibility of a powerful but only short-lived jump in inflation.

See: U.S. Treasury yields fall despite higher inflation: Here are some reasons why

A separate report on U.S. weekly initial jobless claims showed first-time claims for unemployment benefits fell 9,000 to 376,000 in the week ended June 5, the Labor Department said Thursday, marking the lowest level of claims since March 2020. Economists surveyed by The Wall Street Journal had forecast new claims to fall to a seasonally adjusted 370,000.

In Europe, the ECB on Thursday offered few surprises, keeping interest rates unchanged and leaving the size of its asset-purchase programs unchanged, as expected. The ECB said it expected to continue to buy assets under its pandemic emergency purchase program, or PEPP, at a “significantly higher” pace than seen in the early months of this year.

See: No ECB ‘taper tantrum,’ but stage set for market showdown later this year

Meme stocks also were in focus were again in focus on Wall Street, after GameStop Corp. late Wednesday disclosed that the Securities and Exchange Commission had asked for its cooperation with an investigation into the unprecedented volatility its stock has seen in recent months. It also suggested it isn’t the only one being probed.

Capping off the enigmatic trading day was news that the U.S. federal budget deficit has widened to a record $2.1 trillion in the first eight months of the fiscal year. The Treasury Department said Thursday that this is up from a $1.9 trillion deficit over the same period last year.

Which companies were in focus?

  • GameStop late Wednesday appointed two Amazon.com Inc. officials as its new top executives, shortly after private-equity investor Ryan Cohen was voted the company’s chairman of the board. The company also disclosed plans to sell more shares. Shares closed down over 27%
  • Meme stocks all tumbled on the day with AMC Entertainment Holdings Inc. down 13.2%; BlackBerry Ltd. down 8.2%; Koss Corp. down 6.5%; and Nokia Corp. down 0.9%.
  • Shares of RH rose 15.7% after the retailer formerly known as Restoration Hardware topped earnings expectations again at the beginning of 2021, and lifted its forecast for the year.

How did other assets fare?

  • The yield on the 10-year Treasury note TMUBMUSD10Y closed down slightly at around 1.45%, its lowest level since March. Yields and bond prices move in opposite directions.
  • The ICE U.S. Dollar Index DXY, a measure of the currency against a basket of six major rivals, was little changed.
  • Oil futures CL00 advanced, with West Texas Intermediate crude for July delivery up 33 cents, or 0.5%, at $70.29 a barrel. Gold futures GC00 edged lower by $2.20, or about 0.1%, at $1,893.30 an ounce.
  • European equities closed positive but barely so, with the pan-Continental Stoxx Europe 600  up 0.03%. London’s FTSE 100 ended 0.1% higher.
  • In Asia, the Shanghai Composite SHCOMP closed 0.5% higher, Hong Kong’s Hang Seng Index HSI ended virtually unchanged and Japan’s Nikkei 225 NIK picked up 0.3%.

William Watts contributed to this report.

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