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Bad news for the economy is good news for stocks
Signs that growth and inflation might be moderating helped stocks rally sharply over the week, lifting the S&P 500 out of bear market territory. With the exception of energy, all sectors in the index recorded strong gains. Several economic data signaled that the Fed’s monetary tightening was having the intended effect of slowing the US economy and moderating inflation. E.g US home sales fell to their lowest level in May since June 2020, the S&P Global’s index of June manufacturing activity came in well below forecasts (52.4 versus roughly 56) while the University of Michigan’s of June consumer sentiment was revised down to 50.0, its lowest level in records dating back over four decades. On Wednesday and Thursday, Fed Chair Powell testified before Congress that inflation expectations appeared to remain anchored. His comments, along with the weaker-than-expected economic readings, briefly pushed the yield on the benchmark 10-year Treasury note near 3.0%, down significantly from the previous week’s peak of nearly 3.5%. Shares in Europe snapped three weeks of losses as signs that the economy is slowing cast doubt on whether central banks would seek to increase interest rates aggressively. Chinese stock markets advanced on stimulus hopes after President Xi Jinping pledged to roll out more measures to support the economy and minimize the impact of COVID-19. Cryptos have moved sharply higher, with bitcoin +20% and eth +40% from last Saturday's lows.
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The S&P 500 closed at a fresh all-time high on Friday, rising for a 5th consecutive week, its longest weekly winning streak since 2024. This brings the index up +15% since the March 30 low, also marking April as the best month for stocks since November 2022. Stocks largely shrugged off the stream of sometimes conflicting headlines about the war in the Middle East and a surprisingly hawkish Federal Reserve policy meeting to post solid gains in most major indexes. Large-cap stocks outpaced small-caps, and value outperformed growth. Five of the “Mag 7” companies reported earnings, with financial results generally meeting or exceeding expectations for these bellwether firms. Meanwhile, major central banks keep rates on hold amid war uncertainty.