Investors Find Hope as Stock Market Rallies on Positive Inflation Data

Stocks climbed last week as reassuring inflation data boosted investor hopes that the rate-hike cycle was nearing an end amid fresh economic data pointing to continued economic resilience.

The Dow Jones Industrial Average rose 1.25%, while the Standard & Poor’s 500 picked up 2.58%. The Nasdaq Composite index gained 3.25% for the week. The MSCI EAFE index, which tracks developed overseas stock markets, advanced 2.42%.1,2,3

STOCKS RALLY

Stock market momentum gathered steam last week, rallying past the key 4,300 and 4,400 thresholds in the S&P 500–a remarkable feat considering the time it took to break the 4,200 resistance level. 

Optimism was high to begin the week, with expectations that fresh evidence of cooling inflation would provide the Fed room to pause on further rate hikes. The data cooperated as consumer prices rose 4.0% year-over-year (the lowest 12-month number in two years), and producer prices increased 1.1% from a year ago.4

The Fed’s “hawkish pause” briefly unsettled investors, but after some reassessment aided by healthy economic data, stocks rallied before slipping on Friday as the market digested the week’s gains.  

MORE RATE HIKES TO COME?

Federal Reserve officials kept rates steady at last week’s Federal Open Market Committee (FOMC) meeting. However, a majority of committee members indicated at least two more quarter-point rate hikes were likely before year-end.4

Fed Chair Jerome Powell commented that he saw progress in fighting inflation and that no decision was made regarding any future rate increase, saying that members will assess the economic impact of the cumulative rate hikes before the July 25-26 FOMC meeting.5

The Fed raised its 2023 economic growth forecast to 1%, up from its March forecast of 0.4%. The Fed also lowered its unemployment projection to 4.1% from its earlier estimate of 4.5%.6

WHAT DOES THIS MEAN TO ME?

It is understandable after last year’s solid selloff for investors to look with jaundice eye on the current market rally that began October 12, 2022.  However, I would challenge investors to consider the impressive progress of this economy and stock market since 2000.  For reference, the 2000 began an unprecedented stock market selloff lead by NASDAQ and the technology sector.  It took over 13 years for the S&P 500 to recover and surpass its the March 15, 2000 closing price.  NASDAQ needed another 18 months before it finally crossed its previous March 2000 high.  For buy and hold investors, it was a long dry period of volatility with two historic stock market and economic meltdowns that were the 2000 Dot.com bubble bust and the 2008 Great Recession.

However, since January 2016 the past seven and half years investors have enjoyed a trend that has been mostly positive.  As much as everyone would like the stock market to increase every day with no down days, its not a reality.  None the less, since January 2016, the S&P 500 is up 172% and uncharacteristically the NASDAQ is trailing with a gain of only 114%.

Despite both indices having a good 2023, both have a ways to go before surpassing their previous all-time highs reached in October 2022  This is a good issue as previous high points for the indices have always been surpassed at later dates and typically the rally continues for years after.

As mentioned in previous Weekly Briefs, the major indices are above their 20, 50, and 200 Day Moving Averages and the momentum of the positive trend is increasing.  At this point, we maintain our positive view on the US stock market and economy.

Send us an email or call if you have any comments on this Weekly Brief or any questions about your financial planning. We welcome the opportunity to be of assistance to you and your family.

Source: Econoday, June 16, 2023
The Econoday economic calendar lists upcoming U.S. economic data releases (including key economic indicators), Federal Reserve policy meetings, and speaking engagements of Federal Reserve officials. The content is developed from sources believed to be providing accurate information. The forecasts or forward-looking statements are based on assumptions and may not materialize. The forecasts also are subject to revision.