Wall Street rebounded strongly on Tuesday. Investor sentiment was buoyed by easing inflation and a temporary trade agreement between the United States and China. The S&P 500 and Nasdaq finished the day higher for the second day in a row, the first signs of renewed confidence in the economy after weeks of extraordinary uncertainty.
The U.S. and China agreed earlier this week to halt a 90-day trade war that has spooked markets around the world for months. Under the deal, U.S. tariffs on Chinese goods will be cut from 145% to 30%, while China will cut tariffs on American goods from 125% to 10%. The agreement is seen as a way to help companies that depend on global supply chains and as a brief pause in more extensive negotiations.
The deal also occurs as the consumer price index (CPI) indicates a slowdown in inflation. Consumer prices were up a modest 0.2 percent in April, compared to the 0.3 percent increase that economists had expected. This reading is significantly better than March, which showed a dip in prices. Inflation over the last year was 2.3%, from March's year-ago level of 2.4%, giving hope that price pressures may be slackening.
The two developments — a truce in the trade wars and a softening in inflation — have led financial experts to re-evaluate where the U.S. economy is headed. A few have even cut the likelihood of a recession and raised growth forecasts. We now expect economic growth for the year to be 0.6%, up from the previous forecast of only 0.2%.
Markets responded positively. The S&P 500 gained 42.36 points, or 0.72 percent, to end at 5,886.55. The Nasdaq Composite added 301.74 points, or 1.61 percent, to 19,010.09. The Dow Jones Industrial Average, meanwhile, dropped 269.67 points, or 0.64 percent, to 42,140.43. Declining shares of UnitedHealth, down 17.8 percent, accounted for the bulk of the drop in the Dow after the company withdrew its annual outlook and its chief executive stepped down.
More 'positives' around Gilead raises hopes for some optimism seen among technology stocks today, dragging >+2%, whilst a more growth-focused play is back. Among the best-performing companies were shares of Coinbase Global, which gained nearly 24 percent after they were chosen to join the S&P 500 index later this month.
But not all industries shared in the good fortune. Healthcare shares lagged, with the sector tumbling almost 3%. UnitedHealth's stock drop dragged on the sector more broadly, in a sign of investor jitters about leadership and policy uncertainty.
Stalling the threatened arrival of more tariffs is an especially important move for American retailers as they brace for the back-to-school and holiday shopping seasons. Now is the time for importers to bulk up without shouldering higher import costs. Analysts describe the change in U.S.-China trade relations as sudden yet welcome, like maybe a sudden plunge headfirst into winter and then out the other side into a balmy spring.
The idea that the Federal Reserve might postpone cutting interest rates until later in the year has reassured investors. With inflation in check, the central bank may have additional latitude to prioritize employment and growth over any prompt policy changes.
Investors will be closely monitoring crucial earnings reports, particularly those from major retailers, in the coming days. Later in the week, Federal Reserve officials, including the chair, are also set to speak, which could offer more clues about the path of interest rates.
Trading remained brisk, with more than 17.8 billion shares changing hands on U.S. exchanges, compared with the recent daily average. The number of advancing stocks exceeded decliners, a sign of broad optimism.
Recent gains in the S&P 500 and Nasdaq now erase all of their losses in April, when escalating trade tensions were causing markets to tumble. Amid signs that inflation has cooled and that some trade relations may ease, investors are tentatively optimistic that the year could bring a bit more stability.
