Why the Stock Market Soared Wednesday

The stock market soared on Wednesday, finally bouncing back from more than a month of selling pressure. With investors having feared rising inflation, geopolitical challenges, and ongoing disruptions from supply chain problems and pandemic shutdowns overseas, the mood on Wall Street had gotten extremely somber. But all it took was the slightest of good news to send the Dow Jones Industrial Average (^DJI 0.43%), S&P 500 (^GSPC 0.14%), and Nasdaq Composite (^IXIC 0.21%) soaring Wednesday afternoon, with gains of around 3% for all three indexes.

Data source: Yahoo! Finance.

Most of the upward pressure on the markets came after the Federal Reserve released its latest information about its planned monetary policy. Although the immediate action from the central bank was just as most had expected, it was the Fed's future plans that seemed to carry the day for bullish investors.

Higher interest rates are coming

After the two-day meeting of the Federal Open Market Committee, central bankers agreed unanimously to raise the Federal Funds rate  by half a percentage point to a new range of 0.75% to 1 %. That increase was widely expected, as were the Fed's comments suggesting that ongoing increases in the key short-term interest rate at future meetings will remain appropriate.

However, investors took heart from comments that Fed Chair Jerome Powell made in the press conference following the release of the central bank's decision. Asked point-blank whether he anticipated that increases greater than a half percentage point would be necessary, Powell said that such large boosts weren't currently on the table for the central bank. That led many investors to breathe a sigh of relief, having feared that three-quarter point rate increases might be in the cards to combat inflation.

Image source: Getty Images.

The Fed did its best to persuade the investing community that it has a firm grip on inflation and won't allow price pressures to persist. However, the central bank has a limited toolbox to do its part of the job, and while the measures it takes can help try to cool demand for goods and services, it can't do much to address the supply side of the equation. Unfortunately, supply problems have played an inordinately large role in generating inflation, especially with products like automobiles, semiconductor chips, and travel services.

Should investors be so optimistic?

Today's big gain for the stock market might seem like an overreaction. After all, the Fed did confirm that further rate increases are very likely to be right around the corner. Stocks will potentially have competition from fixed-income securities with higher yields for the first time in years.

However, the size of the drop in the major market indexes over the past month might also have been exaggerated, which would justify the outsized bounce on Wednesday. In times of uncertainty, heightened volatility in both directions often results. As more information becomes available, investors gradually get more comfortable with the implications of the situation in which they find themselves. That, in turn, helps lead to more informed and rational investing decisions, with more focus on the long run and less attention to extremely short-term factors.

Unfortunately, there's no way to be sure if the stock market has finally hit bottom or whether today's gains will prove fleeting. The best course of action is simply to try to ignore the air pockets that market indexes have gone through lately and instead concentrate on finding the most attractive investments for the long run that you can find. Over time, that approach is most likely to give you the best results.