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U.S. stocks rose Thursday as investors continued to weigh a number of risks, including the Federal Reserve’s inflation flight and Russia’s war in Ukraine.
The S&P 500 climbed 0.4% to 4,472.77, while the Dow Jones Industrial Average inched up slightly by 0.2% to 34,407.87. The Nasdaq Composite gained 0.4% to 13,976.95.
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The United States will expand its sanctions on Russia in response to its invasion of Ukraine, targeting members of the country’s parliament and the central bank’s gold reserves, the White House said Thursday. Washington is also set to build on its humanitarian assistance by accepting 100,000 Ukrainian refugees and providing an additional $1 billion in food, medicine, water and other supplies.
The initiatives come as President Joe Biden and NATO allies convene in Brussels for a series of summits to discuss the conflict.
In Russia, the Moscow Exchange partially reopened Thursday after a nearly monthlong shutdown to resume local trading in 33 securities, including oil giant Gazprom and Russian majority state-owned financial institution Sberbank. The Central Bank banned short-selling on stocks, however, and prohibited foreign investors from selling stocks. The benchmark MOEX index (IMOEX.ME) gained as much as 10% in early trading.
The White House in a statement early Thursday called the re-opening a “charade,” and noted the government was “artificially propping up the shares of companies that are trading.”
Wednesday marked two years since the S&P 500 bottomed in the 2020 global stock market crash after the World Health Organization moved to declare COVID-19 an official pandemic. Since then, the benchmark has registered its best two-year gain — more than 100% from the low — since 1937, according to data from Bespoke Investment Group.
Although the recovery makes the period the best two-year bull run in history in terms of strength, per Bespoke, U.S. stocks have had a rocky start to 2022 amid a backdrop of growing headwinds.
Historically high levels of inflation have tasked the Fed with reining in surging price levels without slowing economic growth. Stocks have oscillated between gains and losses as traders adjusted to hawkish comments earlier this week from Fed Chair Jerome Powell that indicated officials were prepared to lean into higher short-term interest rates “as needed” to mitigate fast-rising price levels. Powell’s comments come just a week after the central bank lifted its benchmark Federal Funds Rate by 0.25% (to a target range of 0.25% to 0.50%).
“Policymakers were more hawkish than anticipated, exceeding estimates for interest rates and inflation, while reducing forecasts for economic growth,” Comerica Wealth Management Chief Investment Officer John Lynch said in a note.
Since 1958, the last nine interest rate tightening campaigns have seen the S&P 500 register less than average returns of roughly 3.0% in the one-year period following the initial rate hike, Lynch pointed out. However, the index has shown the propensity to climb for more than three years following the initial rate hike, with annualized returns of about 18.0%.
“The era of quantitative easing is seemingly over, and quantitative tightening has begun,” Lynch said. “Though the policy dynamics are shifting, we encourage investors to continue to focus on the long-term fundamentals supporting growth in the economy and corporate profits.”
Tightening also risks bringing the yield curve, the relationship between short- and long-term interest rates of fixed-income securities issued by the U.S. Treasury, closer to inverting. An inverted yield curve, when the short-term rates exceed the long-term rates, has been a signal of a pending economic recession in the past.
“With an economy in late cycle, fears of impending slowdown make defensive sectors relatively more attractive,” Commonwealth Financial Network global investment strategist Anu Gaggar said in commentary. “Thus, for an equity investor, it is imperative to pick your spots carefully.”
“While a paring back of equities may not be necessary, a defensive relative positioning going into a possible slowdown may help investors ride the wave,” he added.
Despite the Fed’s move to raise rates providing some temporary clarity to traders who for months have awaited steps forward on monetary tightening, geopolitical turmoil in Eastern Europe and its economic toll continue to muddy the bank’s path ahead in fighting inflation.
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