Stocks Record Best Stretch of the Year, as Inflation Eases

The stock market posted its best gain of the year, as investors took comfort from early signals that inflation was slowing and the economy was holding up.

S&P 500 up 1.7% on Friday, up for the week to 3.3% and marking the fourth positive week in a row, a feat it has not achieved since October. The index is now 16% above its low in June, though it is still 10% lower on the year.

The rally was in stark contrast to the first half of the year, when Wall Street was Worst start in half a centurySuch as the war in Ukraine, rising energy costs, rising interest rates and rapid inflation have raised concerns among investors about the health of the economy.

Federal Reserve officials have suggested that their campaign to raise interest rates to curb inflation has yet to materialize. But some investors see recent economic data as the basis for the central bank move less forcefullyalleviating worries that higher borrowing costs could push the economy into a severe recession.

“The peak of anxiety about inflation and interest rates is over, and we’re looking at something that’s not really impressive,” said Michael Purves, founder and chief executive officer of Tallbacken Capital.

The latest Consumer Price Index report, released on Wednesday, provided a moment of relief for Wall Street, as inflation slow down 8.5 percent for the year through July, down from a 9.1% rate in the previous month. The data offers early indications that the Fed’s efforts to contain inflation may be working.

Furthermore, data shows that in July the economy get back all the lost jobs during the pandemic, coupled with weeks of better-than-expected earnings reports from companies, has reassured some investors concerned that higher rates, which drive up costs for companies, could cut deeper into financial markets. American company.

CBOE Vix Volatility Index, also known as Wall Street’s “Fear Gauge” because it reflects investors’ feeling of uncertainty over stock market moves, which have fallen below the long-term average of 20 points this week. Vix has remained above that mark since April, so the lower reading could be a sign that investors’ anxiety about a further low has subsided.

“We’ve seen a slew of inflationary pressures start to mount,” said Patrick Palfrey, senior US strategist at Credit Suisse. He added that this “forces” investors to reassess their trading positions.

Bankers said retail investors helped fuel the rally. Sharp rise in so-called stock meme and some cryptocurrencies that rose in price also showed large participation of individual investors.

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

Experts also say the stock market is poised to move higher. Investors have scaled back their bets in the market because of the uncertainty. Trading volume was also low, with many major investors leaving their jobs in August. As a result, even small buybacks helped lift the market, creating momentum as other investors chased profits.

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

But some bankers warn that as long as markets recover quickly, they could fall again. Short-term gains are not unusual during prolonged periods of loss, known as bear market rallies.

After the S&P 500 peaked in October 2007, it fell more than 50% in November 2008 as a result of the collapse of Lehman Brothers. The index then rallied nearly 24% in a matter of weeks. But the sell-off isn’t over yet. The S&P 500 gave up all those gains in early 2009, before bottoming out in March of that year.

Masserio said the Fed’s mandate to bring inflation back to its 2% target is like turning an oil tanker: slow and fraught with risk.

“Basically, what’s built into the system is a lot more complex than what we can fix in six months of monetary policy change,” he said, warning that the market’s woes The stock market may not be over yet.

Shares are higher as the inflation outlook has improved and the economic backdrop remains supportive. While expectations are not as bleak as before, there are doubts about how long the rally can last.

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