The Market is Red Hot Despite Fed's Efforts to Calm the Economy

by Wall Street Rebel - Michael London | 08/10/2022 7:30 AM
The Market is Red Hot Despite Fed's Efforts to Calm the Economy

During the previous two months, investors have placed their bets on a positive conclusion for inflation and growth, leading to a 12 percent increase in the S&P 500.


Even though the Federal Reserve has signaled that it would continue its drive to chill the economy by rising interest rates, the stock market has made a remarkable comeback from its low point in June. Investors are betting that inflation has reached its maximum level.

Recently, a chorus of Fed officials have emphasized that the central bank would need to boost interest rates further higher in order to decrease persistently high inflation. They say this will be necessary in order for the Fed to achieve its goal. Increasing interest rates are perceived as harming share values since they make it more expensive for businesses to operate. Despite this, the S&P 500 has been steadily climbing upward since the beginning of July, posting gains in each of the previous three weeks and increasing more than 12 percent from its low point on June 16.

Investors seem to prefer to concentrate on fading recession fears rather than worrying that a hot economy will encourage the Fed to increase rates more aggressively. This is especially true given that many anticipate that the rate of inflation will start to slow down in the near future.

This line of reasoning will be put to the ultimate test on Wednesday when the most recent statistics from the Consumer Price Index will be made public. According to the results of a poll conducted by Bloomberg that polled experts, the closely awaited report is anticipated to indicate that overall inflation slowed down in July, gaining 8.7 percent from a year earlier, which is a slowdown from the pace of 9.1 percent seen in June.

Recent weeks have seen a batch of quarterly earnings announcements from firms that have helped cheer markets as they have been stronger than anticipated. On Friday, new statistics indicated that corporations in the United States continued to recruit new workers at a healthy pace in the month of December. This indicates that the economy is proving resilient to rising interest rates, which were released on Friday. However, it might also be seen as a hint that the Federal Reserve has to take further action to slow down the economy and bring prices down, increasing the likelihood that interest rates would cause the economy to enter a recession.

Although investors' expectations for where the Fed's main interest rate will be at the end of the year have ticked higher this month, investors continue to forecast that the Fed will not only stop raising rates next year but will also need to cut them somewhat. This is even though investors' expectations for where the Fed's main interest rate will be at the end of the year have ticked higher this month. This was a change from investors' views in June, when they were more in line with the Federal Reserve's own projections that rate rises would continue until 2023.

Suppose it turns out that inflation was managed without destroying the economy and that tighter policy was no longer required. In that case, the Federal Reserve may decrease interest rates the following year. This is the optimistic scenario. The results of a poll of homes conducted by the Federal Reserve Bank of New York and made public on Monday indicated a significant drop in consumers' inflation expectations. These results provide weight to the assumption that an inflationary spiral is not taking root.

There may be other variables at play that explain apparently baffling movements in the market. A sudden shock that demonstrates an acceleration in inflation might swiftly push financial markets down, given the confidence level driving stock prices. As a consequence of this, Alan McKnight, the chief investment officer of Regions Bank, said that he is "less sanguine" than it would seem from looking at the financial markets.

The month of August is often slow for the stock market, with transaction volumes falling as traders leave their offices for their summer holidays. This leaves stock values more vulnerable to sudden shifts as a result of the lack of stability in the market. The number of trading in a $375 billion exchange-traded fund that follows the S&P 500 and trades under the ticker SPY hit its lowest since November last month. This was the first time since November that this level has been reached.

AMC Entertainment, a movie operator, is up more than 60 percent this month, while Bed Bath & Beyond is up more than 120 percent this month. Recently, there has also been a resurgence of fevered trading in "meme" stocks such as these two companies.

The combination of these trading patterns has made it much more challenging to evaluate the trends in the financial markets, which were already struggling with increasing inflation, rising interest rates, and mounting concerns of economic recession.

Ben Snider, a market strategist at Goldman Sachs, said that "it's been an unusual economic climate for many reasons," and he was correct. Since of this, it is difficult to determine whether or not anything is out of the ordinary because everything has been out of the ordinary lately.

The S&P 500 index has been inching down over the last several days, but the reductions have been relatively minor compared to the previous month's gains. Tuesday saw a decrease of 0.4 percent for the index. This may signal that investors are waiting for the inflation statistics to be released on Wednesday before making their next significant move in the market.

Investors are placing their bets on a positive conclusion for inflation and growth, which has been a driving force behind the S&P 500's 12 percent gain over the previous two months.



                       When will the Fed's rate hikes affect the economy?




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