Stocks close out January with rally; S&P 500 up 1.5%

Wall Street closed out a strong January with more gains Tuesday, ahead of what many investors hope will be one of the Federal Reserve's last increases to interest rates for a while.

Markets got a boost after a report showed growth for U.S. workers' pay and benefits slowed during the end of 2022. While that's frustrating for workers trying to keep up with soaring prices, investors see the drop as an encouraging sign of easing pressure on inflation and possibly a gentler Fed in the months ahead.

The S&P 500 rose 58.83 points, or 1.5%, to 4,076.60. The benchmark index notched its third winning month in the past four. The Dow Jones Industrial Average rose 368.95 points, or 1.1%, to 34,086.04. The Nasdaq rose 190.74 points, or 1.7%, to 11,584.55.

With the pace of inflation cooling since the summer, virtually all of Wall Street expects the Fed to announce a quarter-point increase Wednesday to its benchmark overnight rate. That would be its smallest rate increase since March, after policymakers pushed through four straight three-quarter-point increases in 2022, capped by a half-point increase in December.

Such moves try to stamp out inflation by intentionally slowing the economy and dragging down prices for stocks and other investments. The worry is that the Fed will lift rates too high and cause a severe recession. That worry, combined with hopes for an easier Fed, has led recently to sharp swings in markets.

"As long as the Fed is raising interest rates, you will have market volatility," said Mary Ann Bartels, chief investment strategist at Sanctuary Wealth.

"This is a market that is very bipolar," Bartels said. "And that's actually healthy for a market. You don't want one skewed too bullish," or optimistic, and "you don't want one skewed too bearish," or pessimistic. "I think we're balancing out that extreme bearishness in the market."

Bartels said she sees stocks continuing to grind higher through the year, led in particular by energy and industrial companies.

At the central bank, officials so far have pledged to keep rates higher for longer to ensure inflation is truly defeated.

Other reports Tuesday on the U.S. economy came in lower than expected, which could give the Fed leeway to be less harsh on rates.

A measure of confidence among consumers weakened in January, when economists were expecting it to stay flat. And a measure of business activity in the Midwest showed more weakness than expected for January.

The yield on the 10-year Treasury, which helps set rates for mortgages and other loans, slipped to 3.50% from 3.54% late Monday. The two-year yield, which moves more on expectations for the Fed, dipped to 4.20% from 4.24%.

Earnings reporting season is also in top gear, with McDonald's and other big companies headlining the day. They offered a mixed picture.

McDonald's Corp. fell 1.3% despite reporting stronger profit and revenue than analysts expected. What may have disappointed Wall Street was McDonald's forecast for upcoming profit margins. They could imply inflation and cost pressures are continuing to squeeze the company.

Caterpillar Inc. dropped 3.5% after it reported weaker profit than expected but stronger revenue.

On the winning side was General Motors Co., which added 8.3% after reporting stronger profit and revenue than expected.

Stock markets in Asia closed mostly lower, and European markets ended mixed.

Information for this report was contributed by Yuri Kageyama and Matt Ott of The Associated Press.