Stocks ended broadly higher on Wall Street Tuesday, as some of the most breathtaking moves from a manic Monday reversed course.
The S&P 500 rose 1.7% after a report showed inflation is still high but heading lower. Stocks of smaller and mid-sized banks recovered some of their prior plunges caused by worries that customers could yank out all their cash. 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 inflation to be the most important data of the week, if not month. The worry at the time was that inflation is staying stubbornly high, which could force the Federal Reserve to pick up the pace again on its hikes to interest rates.
Such hikes can drive down inflation by slowing the economy, but they raise the risk of a recession later on. They also hurt prices for stocks, bonds and all kinds of other investments.
Tuesday's report showed that 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's still way above the Fed's target.
In normal times, that could indeed call for an increase in the size of rate hikes. The trouble for the Fed is that it's also facing a banking system that may already be cracking due to all of its rate increases from the last year, which came at the fastest pace in decades. The second- and third-largest bank failures in U.S. history have both come since Friday.
"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. Prudence would dictate they pause, but couple it with a stern warning that if inflation trends don't improve that they might need to hike more."
He said the Fed also has other tools to use besides rate increases. Among them: The Fed could adjust the speed at which it's shrinking its massive trove of bond investments, an action that effectively tightens the screws on the financial system.
An easier Fed could give the banking system and economy more breathing room, but it could also give inflation more oxygen.
Traders rushed Monday to place some bets that the Fed could decide to keep rates steady at its next meeting, instead of accelerating to a hike of 0.50 percentage points as they thought a week ago. Following the inflation data, bets are largely falling on it sticking with an increase of 0.25 points later this month, according to data from CME Group.
"From there, something like this should give the Fed pause about how much tightening is already in the system and has just yet to show up, especially when the labor market and the inflation data is cooling," said Ross Mayfield, investment strategist at Baird.
"Markets have been trying to gauge a Fed pivot since last June, it feels like, and gotten it wrong every time," he added. "This feels like an event that could actually push the Fed to pivot."
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 Bancorp. rose 4.5% and Charles Schwab climbed 9.2%.
Among other big movers on Wall Street, Facebook's parent company climbed 7.3% after it said it expects expenses this year to be lower than earlier 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.
The U.S. government announced a plan late Sunday to shore up confidence in the banking system following the failures of Silicon Valley Bank on Friday and Signature Bank on Sunday. Banks are struggling as higher interest rates knock down the value of their investments, while contending with worries that skittish customers could try to withdraw their money en masse to cause a run.
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's a historic-sized move for the bond market. Yields plummeted as investors piled into investments seen as safe and ratcheted back their 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.
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AP Business Writers Yuri Kageyama, David McHugh and Matt Ott contributed.