The S&P 500 rose 1.7% on Friday, bringing its weekly gain to 3.3% and marking its fourth consecutive positive week, a feat it hadn’t accomplished since October. The index is now more than 16 percent higher than its June low, although it remains 10 percent lower for the year. The rally comes in stark contrast to the first half of the year, when Wall Street experienced its worst start in half a century as the war in Ukraine, rising energy costs, rising interest rates and rapid inflation fueled fears of investors for the health of the economy. Federal Reserve officials have suggested that their campaign for rate hikes to tame inflation is far from over. But some investors see the recent economic data as reasons for the central bank to move less aggressively, easing 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 prices for everyday goods and services such as food, furniture, clothing, transport and toys.
Frequently asked questions about inflation
What causes inflation? It may be a result of increasing consumer demand. But inflation can also rise and fall based on developments 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? It depends on the circumstances. Rapidly rising prices cause problems, but modest price gains can lead to higher wages and increased employment.
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 bursts of inflation, while physical assets such as homes hold their value better. “The peak of the inflation and interest rate scare is over and we’re looking at something less dramatic,” said Michael Purves, founder and managing director of Tallbacken Capital. The latest consumer price index report, out on Wednesday, offered a moment of relief for Wall Street as inflation slowed to 8.5% in the year to July from 9.1% the previous month. The data provided an early indication that the Fed’s effort to curb inflation may be working. In addition, data showing the economy regained all the jobs lost due to the pandemic in July, along with weeks of better-than-expected earnings reports from companies, have eased investor concerns that higher interest rates, which raise costs for companies, could have hindered corporate America deeper. The CBOE Vix volatility index, also known as Wall Street’s “fear gauge” because it reflects investors’ sense of uncertainty about stock market movements, dipped below its long-term average of 20 points this week. The Vix had remained above that mark since April, so the lower reading could be a sign that investor concern about another dip lower has subsided. “We’ve seen a number of inflationary pressures start to ease,” said Patrick Palfrey, senior U.S. equities analyst at Credit Suisse. He added that this “forces” investors to re-evaluate their trading positions. Bankers said retail investors contributed to the rally. The sharp rise in so-called meme stocks and the rise of some cryptocurrencies also show heavy participation by individual investors. “The cornerstone of this is the labor market and it’s stable,” said James Masserio, co-head of Americas equities at Société Générale. “If you don’t have a job, then you don’t buy meme stocks.” Experts also said that stock markets were set to climb higher. Investors had reduced their bets on the market because of the uncertainty. Trading volume was also light, with many large investors on vacation until August. As a result, even small amounts of buying interest helped push the market higher, with momentum building as other investors chased returns.
Understand 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 warned that as quickly as markets have recovered, they could fall again. Short-term gains are not uncommon during periods of prolonged 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 collapse of Lehman Brothers. The index then rose nearly 24 percent in a matter of weeks. But the sellout wasn’t over. The S&P 500 gave up all those gains in early 2009 before bottoming out in March of that year. Mr Masserio said the Fed’s task of reducing inflation back to its 2% target was akin to turning an oil tanker around: slow and fraught with risk. “Basically, what had built up in the system is much more difficult than what we can fix in six months of changing monetary policy,” he said, warning that the stock market’s woes may not be over yet. Stocks are higher because the outlook for inflation has improved and the economic environment remains supportive. 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 I’m still an anxious and nervous bull,” Mr Purves said. “We’re not out of the woods yet.”
