Stocks Are Set for Best Stretch of the Year, as Inflation Eases

The stock market is set to post its biggest gain of the year as inflation slows and early signs that the economy is holding up reassure investors.

S&P 500 Rose Futures On Friday, we put the index on track for its fourth straight week of positives. This is a feat he has not accomplished since October. The index is now up nearly 15% from its June low, but remains 10% lower for the year.

The rise is in stark contrast to the first half of this year, when Wall Street got off to its worst start in half a century. The war in Ukraine, rising energy costs, rising interest rates and rapid inflation have fueled investor health concerns. Economy.

Even though Federal Reserve officials have suggested the rate-hiking campaign to curb inflation is not yet complete, some investors see recent economic data as a sign that the central bank will be more aggressive. We see it as a reason to act, alleviating concerns that rising borrowing costs could put the economy in deep trouble. recession.

“The peak of inflation and interest rate fears has passed and we’re looking at a less dramatic picture,” said Michael Purves, founder and CEO of Thorbacken Capital.

The latest consumer price index report released Wednesday brought temporary relief to Wall Street as annual inflation through July slowed to 8.5% from 9.1% the previous month. The data showed early on that the Fed’s attempts to keep inflation down may be working.

In addition, data showing the economy regained all jobs lost to the pandemic in July In addition to weeks of earnings reports that beat corporate expectations, it has allayed investor fears that rising interest rates, which increase corporate costs, could hit corporate America even harder.

The CBOE Vix volatility index, also known as Wall Street’s “fear gauge,” fell below its long-term average of 20 points this week as it reflects investors’ sense of uncertainty over stock market movements. The Vix has remained above that mark since his April, so the lower numbers could indicate that investors’ surprises over a further plunge have subsided.

“We have seen a series of inflationary pressures beginning to reverse,” said Patrick Palfrey, senior U.S. equity strategist at Credit Suisse, who said investors were “forced” to reassess their trading positions. added.

Bankers said retail investors were the driving force behind the gains. The sharp rise of so-called meme stocks and the rise of some cryptocurrencies also show significant participation by retail investors.

James Masserio, co-head of Société Générale’s Americas equities division, said: “The foundation of this is the labor market, which is solid.

Experts also said the stock market is poised to rise.Investors have scaled back their bets on the market because of the uncertainty. Volumes are also low, with many big investors taking a break until August. As a result, even a small amount of buying interest has helped lift the market, building momentum as other investors chase returns.

More than $11 billion flowed into funds buying US stocks in the week through Wednesday, the most in eight weeks, according to EPFR Global.

But some warn that the impasse could be lifted just as quickly as the market recovers. Short-term uptrends are not uncommon during periods of prolonged losses known as bear market uptrends.

After peaking in October 2007, the S&P 500 fell more than 50% through November 2008 following the collapse of Lehman Brothers. After that, the index rose by almost 24% in a few weeks. However, the sale was not over. The S&P 500 gave up all those gains in early 2009, and that year he bottomed out in March.

Masserio said the Fed’s mandate to bring inflation down to its 2% target is akin to reorienting an oil tanker.

“Fundamentally, what’s piled up in the system is much more troublesome than what can be fixed in six months of monetary policy change,” he said, adding that the stock market’s woes may not be over yet. warned.

Equities are rising as the inflation outlook improves and the economic backdrop remains supportive. Expectations aren’t as tough as they used to be, but there are questions about how long the rally will last.

“I am bullish in the market, but I am still an anxious and nervous bull,” Purves said. “We are not out of the woods yet.”