Dow closes nearly 400 points higher as Wall Street bets on easing inflation, smaller rate hikes into year end

The economy will see a weakening of consumer sentiment before the end of the year, says Threadneedle's Ann Berry

Stocks rose on Tuesday as Wall Street watched as Covid policies in China tighten to focus instead on several strong earnings reports and the potential for smaller future rate hikes during a holiday-shortened trading week.

The Dow Jones Industrial Average closed 397.82 points, or 1.18%, higher at 34,098.10. The S&P 500 rose 1.36% to close at 4,003.58, the first close above the 4,000 level since September. The Nasdaq Composite also gained 1.36% to 11,174.41.

Mixed earnings led to a few big stock moves. Best Buy rose about 12.8% after the electronics retailer raised its fiscal 2023 outlook and beat earnings expectations, while Abercrombie & Fitch and American Eagle Outfitters rose 21.4% and nearly 18.2% respectively on their own earnings. On the flip side, Zoom fell about 3.9% and Dollar Tree dropped 7.8% after reporting disappointing earnings and lower-than-expected sentiment, respectively.

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China saw its first mainland deaths from Covid since May over the weekend, prompting officials to ramp up protocols to limit the spread of the virus. Just a week ago the country began easing some of its strict Covid measures, on its way to a looser policy.

China’s reopening would be “very positive from a growth perspective,” according to Seema Shah, chief global strategist at Prime Asset Management.

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“As ever, investors should carefully monitor developments as faithful execution of the reopening plan will be critical to the investment outlook,” she said in a note on Tuesday.

The stocks helped soften bond yields as investors turned their attention toward 2023. Investors also weighed comments from the leaders of the Federal Reserve. On Monday, Cleveland Fed President Loretta Mester said recent inflation data is promising and she would support reduced interest rate hikes going forward. This could mean that the Fed will soon raise its final rate, between 4% and 5%.

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“That’s a big shock for investors who have had nowhere to hide this year,” Phil Camporeale, managing director and portfolio manager at JPMorgan Asset Management told CNBC’s “Squawk on the Street” .

Oil prices rose after Saudi Arabia said OPEC+ would stick to its previously announced output cuts.

Investors will be watching earnings reports from HP Inc and Nordstrom after hours. They will also look at Wednesday’s economic reports, including initial jobless claims and consumer sentiment.

The stock market will be closed on Thursday for the Thanksgiving holiday and will close early on Friday.

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