Stocks Record Best Stretch of the Year, as Inflation Eases

The stock market has seen its best gains of the year as investors take comfort in early signs that inflation is slowing and the economy is holding up.

The S&P 500 rose 1.7 percent on Friday, bringing the rise for the week to 3.3 percent, marking the fourth consecutive positive week, a feat it hadn’t achieved since October. The index is now more than 16 percent higher than the low in June, although it remains 10 percent lower this year.

The rally contrasts sharply with the first half of the year, when Wall Street had its worst start in half a century, as the war in Ukraine, rising energy costs, rising interest rates and rapid inflation fueled investor fears about the health of the economy. .

Federal Reserve officials have suggested that their campaign of rate hikes to curb inflation is not over yet. But some investors see recent economic data as a reason for the central bank to act less aggressively, alleviating concerns that higher borrowing costs could push the economy into a serious downturn.

“The peak of panic over inflation and interest rates is over, and we’re looking at something less dramatic,” said Michael Purves, the founder and CEO of Tallbacken Capital.

The latest consumer price index report, released Wednesday, offered a moment of relief for Wall Street as inflation slowed to 8.5 percent over the year through July, from 9.1 percent in the previous year. month. The data provided an early indication that the Fed’s attempt to contain inflation could have an effect.

In addition, data shows that in July the economy regained all the jobs lost during the pandemic, along with weeks of better-than-expected corporate earnings reports, investors have allayed concerns that higher rates, which increase costs for businesses, could penetrate deeper into corporate America.

The CBOE Vix Volatility Index, also known as Wall Street’s “fear gauge” because it reflects investors’ sense of uncertainty about stock market movements, plunged below the long-term average of 20 points this week. The Vix had been above that figure since April, so the lower reading could be a sign that investor consternation about a new, lower price has eased.

“We’ve seen a succession of inflationary pressures reverse,” said Patrick Palfrey, senior US equity strategist at Credit Suisse. He added that this “forced” investors to re-evaluate their trading positions.

Bankers said retail investors had contributed to the rally. Sharp rises in so-called meme stocks and a rise in some cryptocurrencies also indicate large participation from individual investors.

“The cornerstone of this is the job market, and it’s rock solid,” said James Masserio, co-head of equities for Americas at Société Générale. “If you don’t have a job, you don’t buy meme stocks.”

Experts also said the stock markets were poised to move higher. Investors had scaled back their bets on the market due to uncertainty. Trading volume was also low, with many major investors taking vacations through August. As a result, even small amounts of buying interest have helped boost the market, building momentum as other investors chase returns.

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

But some bankers warned that just as soon as the markets recovered, they could fall again. Short-term gains are not uncommon during periods of prolonged losses, known as bear market rallies.

After peaking in October 2007, the S&P 500 plunged more than 50 percent in November 2008 in the wake of the Lehman Brothers collapse. After that, the index rose by almost 24 percent in a few weeks. But the sale wasn’t over yet. The S&P 500 gave up all of those gains in early 2009 before bottoming out in March of that year.

Mr. Masserio said the Fed’s job of bringing inflation down to the 2 percent target was akin to flipping an oil tanker: slow and risky.

“Essentially, what had accumulated in the system is a lot trickier than what we can solve in six months of a monetary policy shift,” he said, warning that the stock market woes may not be over.

Inventories are higher as the inflation outlook has improved and the economic backdrop remains supportive. While expectations aren’t as strict as they were, there are doubts about how long the rally could last.

“I am bullish in the market, but I am still a fearful and nervous bull,” said Mr Purves. “We’re not out of the woods yet.”