U.S. equities stage massive comeback as investors shrug off inflation report

Stocks staged a massive comeback Thursday, with the Dow Jones Industrial Average surging 1,500 points from its lows to the highest level, as traders shook off another hot inflation report.

The Dow Jones Industrial Average rose 827.87 points, or 2.83%, to close at 30,038.72 after being down more than 500 points earlier in the day. The S&P 500 climbed 2.60% to 3,669.91, breaking a six-day losing streak.

The Nasdaq Composite gained 2.23% to end the day at 10,649.15 after being down as much as 2.39% at session lows. Thursday’s reversal marked the fifth largest intraday reversal from a low in the history of the S&P 500, and it was the fourth largest for the Nasdaq,

The choppy session saw stocks fall to their lowest levels since 2020 following hotter-than-expected inflation data and then post a stunning rebound. The Dow regained more than 1,300 points as traders digested the September consumer price index report. The S&P 500 posted its widest trading range since March 2020.

Investors may be betting that the stronger-than-expected inflation report means price increases will peak soon. Stocks fell to session lows when the September consumer inflation report showed a larger-than-expected increase. The consumer price index increased 0.4% for the month, more than the 0.3% estimate from Dow Jones. On an annual basis, inflation was up 8.2%.

Every stock on the Dow Jones Industrial Average was in the green. Walgreens Boots Alliance (WBA:NASDAQ) was the top performing stock, up more than 6%. JPMorgan (JPM:NYSE) and Goldman Sachs (GS:NYSE) both ticked up, gaining roughly 5% and 4%, respectively, while American Express (AXP:NYSE) rose more than 3%. Shares of Chevron (CVX:NYSE) gained 4.85% as oil prices spiked. Exxon Mobil (XOM:NYSE), Conoco Phillips (COP:NYSE) and British Petroleum (BP:NYSE) also finished positive as their shares surged 3.5%, 5.4% and 4.01% respectively.

Shares of semiconductor stocks Nvidia (NVDA:NASDAQ), Qualcomm (QCOM:NASDAQ), and Micron Technology (MU:NASDAQ) surged 2.2%, 3.5% and 3.9%, respectively, while Applied Materials (AMAT:NASDAQ) jumped 4.5% despite its earlier revenue warning. Big technology names Apple (APPL:NASDAQ) and Microsoft (MSFT:NASDAQ) gained at least 1% each, while Salesforce (CRM:NYSE) and Meta Platforms (META:NASDAQ) held on to slight gains.

However, investors shouldn’t trust the market rebound, and prepare for more volatility ahead. Optimism that inflation has peaked — after the hotter-than-expected CPI report Thursday morning — may probably be short-lived.

There is yet to be clear indication that the Fed would ease its tightening process on just one data point. Yet again, there are parts of the CPI report that are worrying. Rent and owners’ equivalent rent comprised over half of the increase in prices versus the prior month. This suggest that the sticky parts of inflation have not receded.

While there are signs that cost pressures for shelter have rolled over, we could continue to see pressure in future inflation readings given the lagging nature of measurement in the CPI. Overall, the report signals more rate hikes ahead

There is also chatter among Wall Street analysts that Thursday’s big intraday swing could be the product of traders closing out their short bets after a long period of declines for market. Larry Benedict of The Opportunistic Trader believes that the rally was fuelled by short covering.

“People tried to press the short down on the low of the year, and then there was a big short-covering rally. And what I’m seeing here is just a lack of a liquidity. There are no sellers left. The market has no sellers now, for the minute,” Benedict said.

For all it seems, Thursday’s rally has the makings of a bear market rally, the kind of which sucked investors in from late June to mid-August. The Fed is still very much in control of the stock market and until the central bank decides to pivot from its aggressive rate hikes, rallies in the market are bound to be unstainable.