The stock market rebounded on Tuesday as a sharp drop in Treasury yields provided a boost to equities. The Dow Jones Industrial Average jumped 246 points, or 0.7%, while the S&P 500 rose 1% and the tech-heavy Nasdaq Composite climbed 1.2%.
Driving the gains was a significant decline in the 10-year Treasury yield, which fell over 13 basis points to 4.649% and marked the benchmark rate’s first reaction to the escalating Israel-Hamas conflict. The bond market was closed Monday for the Columbus Day holiday.
Investors Flock to Safe Havens Amid Conflict
The downward movement in yields reflects investors flocking to the traditional safe haven of bonds amid geopolitical tensions in the Middle East. The ongoing violence between Israel and Hamas represents the deadliest fighting in the region in 50 years.
Hamas, a militant group backed by Iran, has launched rocket attacks from Gaza into Israel, which has responded with airstrikes. The death toll has surpassed 1,500, with over 900 killed and 2,600 injured in Israel and at least 687 dead and 3,700 wounded in Gaza, according to the latest figures.
Despite the concerning humanitarian crisis, stocks posted solid gains as lower yields provided a lift and stabilizing oil prices eased worries about inflation. Investors also seem to be looking past the geopolitical turmoil caused by the conflict, helped by last Friday’s stronger-than-expected jobs report and optimism about upcoming corporate earnings.
“I think that move lower in yields has supported equity markets broadly. It may also be bringing relief to markets that perhaps there is some sort of peak in this rapidly upward moving yield in the last few years,” said Mona Mahajan, senior investment strategist at Edward Jones. “There’s the kind of hope building that perhaps we are at the end of the Fed tightening cycle, as well as the rising rates.”
Inflation Data Looms Large
Mahajan noted that investors are keenly focused on inflation data scheduled for release this week. The producer price index, which measures wholesale inflation, is set to be published on Wednesday. The more closely watched consumer price index, which tracks retail inflation, will come out on Thursday.
Economists are expecting to see a moderation in price pressures. If the reports meet or exceed expectations, it could reinforce the narrative that inflation has peaked and the Federal Reserve can start slowing its aggressive pace of interest rate hikes.
On the other hand, hotter-than-expected inflation reads could dash hopes for a dovish pivot by the Fed and send yields higher again. The central bank has been raising rates aggressively this year in an effort to tame scorching inflation, sparking concerns over an economic slowdown.
Oil Prices Ease Inflation Worries
In another positive sign for inflation, oil prices eased on Tuesday after surging in the previous session. West Texas Intermediate crude oil, the U.S. benchmark, fell 0.9% to trade near $91 per barrel. Brent crude, the international standard, also declined 0.9% to around $96 per barrel.
Falling oil prices help relieve inflationary pressures since crude is a key input cost for transportation, manufacturing and heating homes. Gasoline prices at the pump have come down significantly from summer highs but remain elevated compared to recent years.
The drop in yields boosted stock market sectors that are sensitive to interest rates, like technology and other high-growth companies. Big tech names like Apple, Microsoft, Amazon and Google-parent Alphabet all traded higher.
The market is also gearing up for the start of third-quarter earnings season. PepsiCo got things started on a positive note, with its shares rising 1.4% after the company reported better-than-expected results and lifted its full-year earnings guidance. Several major banks, airlines and other blue chip companies are on deck to report results later this week.
Industrial and Energy Stocks Extend Gains
Stocks in the industrial and energy sectors extended their recent stretch of gains on Tuesday. Solar company Enphase Energy jumped over 5%, while generator maker Generac Holdings climbed 5.6%.
Both stocks have benefited from Biden administration policies aimed at combating climate change and boosting clean energy. Last week, the White House announced new solar tariff exemptions as part of efforts to accelerate domestic solar deployment and manufacturing.
Major oilfield services providers Schlumberger and Halliburton posted more modest gains of around 2% each. The stocks have surged along with crude prices for much of 2022, though they’ve pulled back in recent weeks amid heightened recession fears.
Despite Tuesday’s rally, the major indexes remain deep in bear market territory after peaking in early January. Lingering uncertainties over the Fed’s rate hiking path, future inflation trends and geopolitical hotspots mean volatility is likely to remain high in the near term.