Stocks ended broadly higher Tuesday on Wall Street as some of the most breathtaking moves from a manic Monday reversed course.
The S&P 500 rose 1.7% after a federal report showed consumer inflation remains high but is trending lower on an annual basis. Stocks of smaller and mid-sized banks recovered some of their prior plunges caused by worries that customers would start yanking out cash after two large bank failures since Friday. Treasury yields soared to trim their historic drops.
The Dow Jones Industrial Average rose 1.1%, while the Nasdaq composite added 2.1%. Gains in technology stocks, banks and communications services companies powered much of the rally.
A week ago, Wall Street was expecting Tuesday's report on consumer inflation to be the most important data of the week, if not month. The worry at the time was that inflation remains stubbornly high, which is expected to force the Federal Reserve to pick up its pace of interest rate increases.
Such increases can drive down inflation by slowing the economy, but also raise the risk of a recession. The higher borrowing costs also hurt prices for stocks, bonds and other investments.
Tuesday's report showed inflation at the consumer level was 6% in February, versus a year before. That matched economists' expectations and was a slowdown from January's 6.4% inflation rate, but it is still way above the Fed's 2% target.
Typically that would call for an increase in the size of rate increases. The trouble for the Fed is that it is also facing a banking system already stressed under its rate increases over the past year, which came at the fastest pace in decades.
"The Fed is stuck between a rock and a hard place," said Brian Jacobsen, senior investment strategist at Allspring Global Investments.
"Inflation met expectations, but is still uncomfortably hot. Financial stresses are intense," Jacobsen said. "Prudence would dictate they pause [rate increases], but couple it with a stern warning that if inflation trends don't improve that they might need to hike more."
The U.S. government announced a plan late Sunday to shore up confidence in the banking system after the failures of Silicon Valley Bank on Friday and Signature Bank of New York on Sunday.
Banks are struggling as higher interest rates knock down the value of their investments, while contending with worries that skittish customers will try to withdraw money en masse to cause a run on deposits.
Jacobsen said the Fed has other tools to use besides rate increases. Among them: The Fed can adjust the speed at which it is shrinking its trove of bond investments, an action that effectively tightens the screws on the financial system.
Traders rushed Monday to place some bets that the Fed will decide to keep rates steady at its next meeting, instead of accelerating to a half-point increase as they thought a week ago. After the inflation data, bets are largely falling on policymakers sticking with a quarter-point increase next week, according to data from CME Group.
Stocks across the financial industry rose Tuesday, recovering some of their steep earlier drops. First Republic Bank jumped 27% after plunging 67.5% over the prior three days. KeyCorp gained 6.9%, Zions Bancorporation rose 4.5% and The Charles Schwab Corp. climbed 9.2%.
Among other big movers on Wall Street, Facebook and Instagram parent company Meta Platforms Inc. climbed 7.3% after it said it expects expenses this year to be lower than forecast. Meta Platforms is cutting workers and eliminating job openings to rein in expenses.
All told, the S&P 500 rose 64.80 points to 3,920.56, ending a three-day losing streak. The Dow added 336.26 points to 32,155.40, and the Nasdaq gained 239.31 points to 11,428.15.
Some of the wildest action has been in the bond market, where the yield on the two-year Treasury plunged Monday by roughly half of a percent. That is a historic-sized move for the bond market. Yields plummeted as investors piled into investments seen as safe and ratcheted back expectations for future rate increases by the Fed.
The two-year yield climbed back to 4.21% from 4.02% late Monday, another huge move. The 10-year yield jumped to 3.66% from 3.55%. It helps set rates for mortgages and other important loans.
European markets also rebounded after a broad retreat in Asia.
Information for this article was contributed by Yuri Kageyama, David McHugh and Matt Ott of The Associated Press.