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Stocks flirt with record high despite signs of economic slowdown

How to navigate market turbulence
How to navigate market turbulence 06:56

Wall Street almost set a new record on Wednesday, a sign investors continue to believe in the underlying strength of the coronavirus-stricken economy. 

The market's continued rise has confounded some skeptics who believe the pandemic and resulting recession are likely to worsen. 

"Despite sizeable interventions by monetary and fiscal policymakers, the economic data indicate that the recovery may be losing steam, as activities in many states are once again restricted, officially or voluntarily, to slow the virus's spread," said Boston Federal Reserve Bank President Eric Rosengren in a speech on Wednesday.

Economists at Bank of America also raised doubts about the recent pace of the economic rebound. "Economic activity has continued to recover in early August, however the gains are more modest than earlier months," they said in a report to clients on Tuesday. "We think that further improvements on the virus front will be needed for the recovery to accelerate."

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The S&P 500 index, which is made up of 500 of the largest publicly traded stocks, rose to 3,387 during trading on Wednesday before closing at 3,380, up 46 points, or 1.4%. That was just 6 points below the market's peak close of 3,386 on February 19. The benchmark index is now up just over 4% for the year. 

"Risk appetite recovered on Wednesday, with North American stocks making up for Tuesday's losses despite no signs of progress in stimulus talks in Congress," analysts with TD Securities said in a note.

The lift followed gains for stocks across Europe and much of Asia, while Treasury yields continued their sharp rally after a report on inflation came in higher than expected for the second straight day. The Dow rose 260 points, or just under 1%, while the tech-heavy Nasdaq rose 229 points, or roughly 2%.

The stock market is has nearly erased all of its losses after the pandemic tipped the economy into recession. In March, the S&P 500 had been down nearly 34% from its record.

Much of the rebound has been due to massive amounts of support from the Federal Reserve, which has slashed interest rates to nearly zero and propped up far-ranging corners of the bond market to keep the economy's head above water. The ultra-low interest rates mean investors are getting paid very little to own bonds, which pushes some into stocks, boosting their prices.

Congress has also offered unprecedented amounts of aid, though it's hit an impasse in negotiations to re-up its assistance.

All that support has investors willing to look a few months or a year into the future, when a vaccine for the virus could be available and helping the economy get back to normal. More importantly for stock prices, the expectation is that corporate profits will also rebound from their current coronavirus-caused hole.

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Technology stocks were among the biggest forces prodding the market higher. It's a return to form for them, following a mini-stumble in recent days.

Big tech-oriented giants like Apple, Microsoft and Amazon have been the year's biggest winners, carrying the stock market through the pandemic despite the worries about the economy, on expectations they'll continue to deliver strong growth regardless of whether people are quarantined.

Tesla jumped another 13% Wednesday after announcing a 5-for-1 split of its stock, in hopes of making the price of each share more affordable to investors. The stock has surged past $1,550 after starting the year a little below $420.

A report on Wednesday showed that inflation remains very low, but it ticked up more last month than economists expected. Economists debated how much value the report has, given that inflation is likely to remain weak with the pandemic flattening the economy.

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If inflation were to reappear, it could weaken the Federal Reserve's commitment to keeping interest rates low and could ultimately draw some investors away from stocks.

Other risks also continue to loom over the market, including worsening tensions between the U.S. and China. Tech companies have been in focus in particular, and worries about potential retaliation by China were a big reason for U.S. tech stocks' struggles earlier in the week.

Partisan rancor in Washington is also threatening the possibility of more federal stimulus. A $600 weekly unemployment benefit from the U.S. government expired in July, and investors say the economy needs another big lifeline from Washington. President Donald Trump signed several executive orders this past weekend to offer some assistance, but critics say they fall well short of what's needed.

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