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Stocks rally for a second day, regaining some lost ground

Traders on the floor at the New York Stock Exchange in New York on Tuesday.Seth Wenig/Associated Press

Stocks rose sharply again Tuesday, extending gains from the previous day and rebounding from a painful decline in September, as some investors bet that the rapid pace of interest rate increases that have raised costs for companies may soon begin to moderate.

The Standard & Poor’s 500 rose 3.1 percent on Tuesday; it’s largest one-day gain since May 2020 and the early recovery from the market turmoil induced by the coronavirus pandemic. The gain added to a rise of 2.6 percent on Monday.

Some investors are beginning to anticipate that with some signs of inflation easing and economic growth slowing, a peak in interest rates may come sooner than anticipated. Such an outcome would provide relief for companies expected to report a drop in quarterly earnings in their latest batch of reports, which they will begin to release this month.

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However, the view that inflation and interest rates have peaked has been undermined before, and rallies like this week’s have been short-lived. The last time the S&P 500 posted two consecutive days of gains in excess of 2.5 percent each was in December 2008. The index fell a further 25 percent from then before hitting its low in March 2009.

“With sentiment toward equities already very weak, periodic rebounds are to be expected,” said Mark Haefele, the chief investment officer at UBS Global Wealth Management. “But markets are likely to stay volatile in the near term, driven primarily by expectations around inflation and policy rates.”

Nevertheless, investors have been looking for indications that the Federal Reserve could let up its campaign to raise interest rates. A government report Tuesday offered hope, showing a larger-than-expected decline in job openings in August, although hiring, quitting, and layoffs remained steady.

Signs of a slowing labor market would reinforce the view that inflation could more consistently fall in the coming months, removing pressure on the Fed to tighten its policy so aggressively. Amazon is freezing corporate hiring in its retail business, according to a company memo, a division where about 20,000 job openings were recently posted. Facebook’s parent, Meta, told employees last week that it would freeze hiring and reduce budgets across most of its teams.

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Tuesday’s rally was driven by a rise in the stock prices of companies that suffered the most through the pandemic-induced slowdown and, curtailed by higher inflation and interest rates, have yet to fully benefit from the economic recovery that came from the loosening of COVID-19 restrictions. Cruise operator Royal Caribbean rose more than 16 percent and casino company Caesars Entertainment gained more than 11 percent. Airlines Delta and American both rose more than 8 percent.

Twitter jumped more than 22 percent after Elon Musk proposed going ahead with a deal to acquire the company at the price originally agreed, potentially ending the legal fight over whether the billionaire could pull out of the agreement struck nearly six months ago.

Positive sentiment echoed around the globe, bolstered by the Reserve Bank of Australia, the country’s central bank, raising interest rates by less than expected Tuesday, adding to the sense that other central banks might also start to slow the pace of increases.

“The move to a lesser rate hike by the RBA, alongside the weak data on job openings, has given investors a narrative that we could be setting up for a downshift to a less aggressive path of rate hikes,” said Liz Ann Sonders, the chief investment strategist at Charles Schwab.

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Europe’s Stoxx 600 rose 3.1 percent and the Britain’s FTSE 100 gained 2.6 percent. In Asia, Japan’s Nikkei 225 gained 3 percent.

Oil prices — a large input into measures of inflation — also continued their rally Tuesday. The price of West Texas Intermediate crude, the US benchmark, rose 3.4 percent to above $86 a barrel, building on a 5 percent gain the day before on reports of supply cuts by major energy producers.

The two-day rally for the S&P 500 still leaves the index down more than 20 percent this year, after it recorded a losing streak of three straight quarters, a grim milestone not seen since 2008.

And economists remain concerned that with inflation still running well above the Fed’s target of 2 percent, the need to raise interest rates further could still tip the US economy into a severe downturn.

“Central banks face a brutal trade-off in this new regime: either live with inflation or the economic damage needed to tame it quickly,” analysts at BlackRock’s Investment Institute wrote in a recent report. “There’s no way around this.”