The stock market posted its best period of gains of the year as investors took heart from early signs that inflation is slowing and the economy is taking hold.
The S&P 500 rose 1.7 percent on Friday, extending its weekly gain to 3.3 percent and marking its fourth consecutive positive week, a feat not accomplished since October. The index is now more than 16% higher than its June low, although it remains down 10% for the year.
The rally is in stark contrast to the first half of the year, when Wall Street suffered its worst start in half a century as the war in Ukraine, soaring energy costs, rising interest rates and rapid inflation stoked investor fears about the health of the economy.
Federal Reserve officials suggest that their campaign to raise interest rates to tame inflation is far from over. But some investors see the latest economic data as reason for the central bank to act less aggressively, allaying concerns that higher borrowing costs could push the economy into a deep recession.
Frequently Asked Questions About Inflation
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Frequently Asked Questions About Inflation
What is inflation? Inflation is a loss of purchasing power over time, meaning your dollar won’t go as far tomorrow as it does today. It is usually expressed as the annual change in the prices of everyday goods and services such as food, furniture, clothing, transport and toys.
Frequently Asked Questions About Inflation
What causes inflation? This may be the result of increasing consumer demand. But inflation can also rise and fall based on events that have little to do with economic conditions, such as tight oil production and supply chain problems.
Frequently Asked Questions About Inflation
Is inflation bad? Depends on the circumstances. Rapid price increases cause problems, but moderate gains can lead to higher wages and job growth.
Frequently Asked Questions About Inflation
Can inflation affect the stock market? Rapid inflation usually spells trouble for stocks. Financial assets in general have historically performed poorly during inflationary booms, while tangible assets such as houses have held their value better.
“The peak of anxiety about inflation and interest rates is over and we’re looking at something less dramatic,” said Michael Purves, founder and CEO of Tallbacken Capital.
The latest consumer price index report on Wednesday offered a moment of relief for Wall Street as inflation slowed to 8.5 percent in the year to July, down from 9.1 percent in the previous month. The data offered an early indication that the Fed’s attempt to rein in inflation may be having an effect.
Moreover, data showing the economy regained all the jobs lost during the pandemic in July, along with weeks of better-than-expected corporate earnings reports, eased some concern among investors that higher rates, that drive up costs for companies may be seeping 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, fell below its long-term average of 20 points this week. The Vix has been holding above that mark since April, so the lower reading could be a sign that investors’ fears of a further downgrade have subsided.
“We’ve seen a streak of inflationary pressures start to turn,” said Patrick Palfrey, senior U.S. equity strategist at Credit Suisse. He added that this “forces” investors to reassess their trading positions.
Bankers said retail investors helped fuel the rally. The sharp rise in so-called meme stocks and the rise of some cryptocurrencies also point to heavy participation by individual investors.
“The cornerstone of this is the labor market, and it’s stable,” said James Masserio, co-head of equities for the Americas at Société Générale. “If you don’t have a job, you don’t buy meme stock.”
Experts also said stock markets are poised to rise. Investors had reduced their bets on the market due to uncertainty. Trading volume was also light, with many large investors taking time off until August. As a result, even small amounts of buying interest helped lift the market, with momentum building as other investors chased returns.
Find out about inflation and how it affects you
More than $11 billion flowed into funds buying U.S. stocks in the week to Wednesday, according to EPFR Global, the most in eight weeks.
But some bankers have warned that just as quickly as markets have recovered, they could fall again. Short-term gains are not uncommon during periods of extended losses known as bear market rallies.
After the S&P 500 peaked in October 2007, it fell more than 50 percent by November 2008 after the bankruptcy of Lehman Brothers. The index then rose almost 24 percent in a few weeks. But the sale wasn’t over. The S&P 500 gave up all of those gains in early 2009 before bottoming out in March of that year.
Mr. Maserio said the Fed’s task of reducing inflation back to its 2 percent target was akin to turning an oil tanker: slow and fraught with risk.
“Fundamentally, what has built up in the system is much more complex than what we can fix in six months of changing monetary policy,” he said, warning that the stock market’s problems may not be over yet .
Stocks are higher because the outlook for inflation has improved and the economic environment remains favorable. Although expectations are not as gloomy as they were, there are doubts about how long the rally can last.
“I’m bullish on the market but still an anxious and nervous bull,” Mr Purves said. “We’re not out of the woods yet.”
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