Stocks Gain for Second Month in a Row

The S&P 500 notched a second month of gains but remained on track for its worst year since 2008 after rapidly rising interest rates battered stocks.

The broad U.S. stock index is down about 15% this year even after rallying in October and November. The tech-heavy Nasdaq Composite, whose members tend to be especially sensitive to changing rates, has slumped 27% in 2022.

Stocks have pulled back this year as the Federal Reserve lifts rates in an attempt to tame sky-high inflation. Higher rates give investors more options to earn a return outside the stock market and ding the worth of companies’ future earnings in commonly used valuation models.

“It’s been a pretty one-dimensional year,” said Matt Orton, chief market strategist at Raymond James Investment Management. “The persistence of inflation has dominated everything else.”

Major indexes have pared their losses in recent weeks, boosted by a slowdown in inflation and hopes that the Fed will slow its campaign of rate increases starting in December.

That optimism was bolstered Wednesday when Fed Chairman Jerome Powell indicated in a speech that the central bank is on track to raise interest rates by a half percentage point at its December meeting. That would mark a downshift after a series of four 0.75-point rate rises.

Stocks rallied as Mr. Powell spoke, lifting the S&P 500 3.1% for the day. The Dow Jones Industrial Average rose 2.2%, or about 735 points, in 4 p.m. ET trading, while the Nasdaq Composite jumped 4.4%. The sharp move was enough to put the Dow industrials back in a bull market, defined as a 20% rise from a recent low.

“Today’s speech gives more hope for the possibility of that elusive soft landing,” said Hank Smith, head of investment strategy at Haverford Trust. “From the market’s perspective there’s the chance of a soft landing as opposed to a hard landing that’s a traditional recession.”

Investors will closely watch inflation data due to be published on Dec. 13 for further clues about the path of interest rates.

“Operation catch-up is what this year has been all about and I think it’s over,” said Hani Redha, portfolio manager at PineBridge Investments. “They’ve caught up. They’re in a decent place,” he said of the Fed.

Still, Mr. Redha said Mr. Powell could be seeking to push back at expectations of a looming pivot toward easier monetary policy.

Mr. Redha said stocks are likely to come back under pressure in early 2023. The Fed, he said, will continue to tighten monetary policy through its bondholdings even if it stops raising interest rates, while a recession will hurt earnings.

Money managers also are eying corporate earnings as a potential drag on stocks in the months to come. Analysts are forecasting profits from S&P 500 companies will rise more than 5% next year, according to FactSet. But many investors think those projections are unrealistic.

“Earnings estimates are too high for 2023,” said Niladri Mukherjee, head of CIO portfolio strategy for Merrill and Bank of America Private Bank. “They need to come down.”

Government bond prices have risen since data published Nov. 10 showed inflation slowed in October, sparking hopes the Fed will ease off the brakes.

The yield on 10-year Treasurys declined to 3.699% Wednesday, from 3.746% Tuesday. It is down from more than 4% at the start of the month.

Yields on longer-term U.S. Treasurys have fallen far below those on short-term bonds, a sign investors think the Fed is close to winning its inflation battle—and that the economy is heading toward recession.

Falling yields, coupled with easing fears of a steep European downturn, have pulled the dollar down from multiyear highs. The WSJ Dollar Index fell 4.2% this month through Tuesday, putting it on pace for its largest one-month percentage decline since 2010.

Global markets broadly rose Wednesday. Travel, leisure and auto stocks helped push the Stoxx Europe 600 up 0.6%. China’s Shanghai Composite Index added about 0.1%. The Hang Seng rose 2.2%, closing out the biggest one-month advance for the Hong Kong benchmark since 1998.

Oil benchmark Brent crude rose 2.9% to $85.43 a barrel. Traders are awaiting details of the price cap that the U.S. and its allies are due to impose on Russian oil next week. The level of the cap is still under negotiation in the European Union.