For the first time in a long time, the stock market is gaining ground as investors grow more confident in the global economy. As of Friday, the S&P 500 rose by 1.7%, bringing the weekly increase to 3.3%. More importantly, last week marks the fourth consecutive week of gains for the index, representing consistent improvement not seen since October 2021. Because of these gains, the index is now 16% higher than it was at its June nadir. That said, it is over 10% lower than January. The first half of 2022 was historically disastrous for the stock market. Due to the war in Ukraine, skyrocketing energy prices, interest rate increases, and rapid inflation, Wall Street experienced its worst start to a year since the 1970s.
The S&P’s improvement has to do with changing attitudes regarding inflation and the global economy in general. In the US, there are signs that inflation is slowing. Moreover, there are signals that the American economy is behaving surprisingly resiliently. The data shows that inflation is finally cooling, and the strong labour market coupled with sustained company revenue has reassured many investors that the market’s fundamentals are in order. Because of these improvements, investors and their lobbyists are pushing the Federal Reserve to deviate from its previously announced plan to steadily raise interest rates to tame inflation. They fear that if rates rise any further, high rates will keep borrowing costs so high that the economy will experience another significant downturn.
Overcompensation
Even though inflation is slowing, considerable fear remains about its resurgence. The most recent Consumer Price Index report released last week showed that inflation had slowed to 8.5% for the year, down from July’s 9.1%. These figures show that the Fed’s attempts to keep inflation in check are working. The problem with the Fed’s primary method for doing so – interest rate increases – is that it has a delayed-onset effect. Therefore, if the Fed turns the dial too much, it will be hard for them to know so before it is too late. But just because investors have said that the economy cannot handle more rate hikes does not mean that is actually true. These parties have vested interests in keeping rates low, so they are not exactly impartial contributors to this economics discussion.
There has also been some good news regarding the strong labour market. Although we have become accustomed to hearing how the labour market is too strong, it is still fantastic news that the US economy has now officially regained all the jobs lost during the pandemic. Jobs are the cornerstone of the economy. Although raising worker pay can fuel inflation, it is certainly better than the alternative—people not having jobs. Now that the market is improving and the economy appears stable, many traders have had to re-examine their positions. They have been dealing with a bear all year, and now it is time to contend with a little bull.