Despite mixed economic news weighing on stocks early on, the indexes rebounded by late afternoon due to light trading ahead of the holiday weekend.
The S&P 500 reversed a 0.7% loss to close 0.6% higher, with the Dow Jones Industrial Average rising 0.5% and the Nasdaq composite gaining 0.2%. The S&P 500 and Nasdaq both posted their third straight weekly loss.
Market conditions are difficult as strong consumer spending and employment reduce the risk of a recession but also increase the threat of higher interest rates from the Federal Reserve in its efforts to combat inflation.
Mixed Economic News on Inflation and Consumer Spending
The government reported that a key measure of inflation is continuing to slow but is still higher than desired. The Federal Reserve closely monitors the personal consumption expenditures price index in the consumer spending report, even more than the well-known consumer price index. In addition, growth in consumer spending weakened more than expected last month, but incomes were slightly stronger than expected.
A separate report from the University of Michigan showed that U.S. households are lowering their forecasts for upcoming inflation, which could help avoid a scenario the Federal Reserve is keen to prevent: a cycle where shoppers rush to make purchases in anticipation of price increases, which would only worsen inflation.
Treasury Yields Rise on Economic Reports; Focus Turns to Corporate Earnings
Treasury yields rose following the reports, with the yield on the 10-year Treasury, which influences mortgage rates, increasing to 3.75% from 3.69%, and the yield on the two-year Treasury, which tends to track actions by the Fed, rising to 4.31% from 4.28%.
These latest reports are the last major economic updates of the year, and investors will soon turn their focus to the next round of corporate earnings. Most investors are hoping to get a clearer picture of consumer health and corporate profits through these reports and forecasts.
Federal Reserve Interest Rate Hike Plan, Global Inflation, and Company Earnings Reports
The Federal Reserve has been open about its plan to remain aggressive in raising interest rates to curb inflation, even as the pace of price increases continues to ease. The Fed has already raised its key overnight rate to its highest level in 15 years, and the federal funds rate stands at a range of 4.25% to 4.5%. Fed policymakers forecast that the rate will reach a range of 5% to 5.25% by the end of 2023, with no rate cut expected before 2024. These high rates have raised concerns about the economy slowing too much and entering a recession in 2023, as well as weighing on stock and investment prices.
Inflation remains a global issue, with Japan reporting its core inflation rate, excluding volatile fresh foods, rising to 3.7% in November, the highest level since 1981, due to rising costs for oil and other commodities contributing to upward price pressures in the world's third-largest economy.
Around 80% of stocks in the S&P 500 have reported earnings for the latest quarter, with the majority beating analysts' expectations. However, many companies have also issued weaker-than-expected guidance for the coming quarter.
In company news, shares of Airbnb rose 4.7% after the home-sharing company announced that it would go public in 2020. The company is expected to be valued at around $30 billion.
