US stocks snapped a seven-week losing streak on Friday, as investors bet that softening economic data would be enough to slow the Federal Reserve’s tightening monetary policy.
The blue-chip US equities index, the S&P 500, finished the week 6.6 per cent higher, its best showing since November 2020, ending the longest run of weekly losses since 2001. The technology-heavy Nasdaq Composite also rallied, up 6.8 per cent for the week.
Weaker economic data, coupled with early signs that inflation may have peaked, gave investors enough reason to dial back their expectations for how aggressively the US central bank will raise interest rates. Higher rates raise borrowing costs for companies and can curtail future earnings.
Despite the bounce in stock prices, some investors remain wary. The positive narrative only holds if softening data does not foretell a recession, and if the Fed’s campaign to curb inflation is successful before it cuts too far into growth.
“We still think this is not the end of the downdraft, but more a bear market bounce,” said Alex Veroude, chief investment officer at Insight Investment.
Tuesday was the only day stocks recorded a loss, following weak manufacturing data and a report of lower-than-expected new home sales. That data added to nervousness following a number of weak first-quarter earnings reports from marquee retailers such as Target and Walmart last week.
And on Wednesday the release of minutes from the Fed’s latest monetary policy meeting confirmed a hawkish tone, but still not as aggressive as some analysts had expected.
On Thursday, markets were encouraged by better than expected earnings from major retailers Macy’s, Dollar General and Dollar Tree, helping to offset last week’s concerns about the sector.
Friday offered another boost when official data showed personal spending – a sign of inflationary pressure in the US economy – eased slightly.
Break-even inflation rates, a market measure of inflation expectations, also dropped over the week. Expectations of where the Fed’s key interest rate would be by December fell from 2.8 per cent to 2.6 per cent, suggesting a smaller series of increases in the future.
Investors, scarred by recent losses, have paused to question if the sell-off this year is overdone. Even after the past week’s gains, the S&P 500 is down 12.8 per cent this year, while its aggregate market cap has fallen by $ 6.8tn from its peak in January.
“Overall sentiment is very bearish,” said Paul Leech, co-head of global equities at Barclays. “But people are also trying to reconcile the lack of positive catalysts ahead with how much bad news is already in the price.”
Some analysts also pointed to the likelihood that recent gains in Treasury bonds, and losses for stocks, have prompted some investors to rebalance their portfolios back into equities, supporting share prices. In the week to Wednesday more than $ 21.8bn flowed into US equities, the most in 10 weeks, according to Bank of America.
The rise in US stocks helped lift bourses across the globe. The FTSE All World index gained 4.9 per cent for the week, narrowly avoiding a record number of weekly losses. The Europe-wide Stoxx 600 index finished the week 3 per cent higher and the FTSE 100 moved up 2.6 per cent in the UK, where data also showed weakness.
Business activity in Britain has flatlined, according to an S&P Global index based on a survey of purchasing managers. The Bank of England has raised interest rates earlier and more aggressively than the Fed, but inflation – driven in large part by higher commodity prices because of the war in Ukraine – is expected to reach 9 per cent in May.
Some investors remain on the edge, concerned about the conundrum facing central banks, which must either allow inflation to run hot in order to stem falling asset prices and slower growth, or continue raising rates to quell inflation at the risk of triggering a recession.
“The market doubts the Fed’s ability to follow through on policy,” said Société Générale trading strategist Michael Pintar, in a note to the bank’s clients on Thursday evening. “I think we will get to a point over the next few months where it becomes apparent that market expectations are wrong and rates will move higher along with volatility.”