Soft landing hopes for the US economy give Wall Street investors a sense of respite

Optimism is slowly returning to the US stock market as some investors grow more confident that the economy can avoid a severe downturn even as it faces high inflation.

The benchmark S&P 500 has rebounded about 15% since mid-June, halving its year-to-date loss, and the tech-heavy Nasdaq Composite is up 20% during that period.

Many of the so-called meme stocks that had been pummeled in the first half of the year have rallied, while the CBOE volatility index, known as Wall Street’s fear gauge, is near a four-month low.

Last week, bullish sentiment hit its highest level since March, according to a survey by the American Association of Individual Investors.

Earlier this year, that gauge fell to its lowest level in nearly 30 years, when stocks slumped on concerns about how monetary tightening by the Federal Reserve would affect the economy.

“We’ve been through quite a bit of pain, but the perspective of how people negotiate has turned violently towards a glass half full versus a glass half empty,” said Mark Hackett, head of research at investments at Nationwide.

Data from the past two weeks have bolstered hopes that the Fed can achieve a soft landing for the economy. While last week’s jobs report eased recession fears, inflation figures this week showed the sharpest month-on-month deceleration in consumer price increases since 1973 .

The shift in market sentiment was reflected in data released by BoFA Global Research on Friday: Tech stocks saw their biggest inflows in about two months over the past week, while risk-hedged Treasuries , which are used to hedge against inflation, recorded their fifth straight week of outflows.

“If, in fact, a soft landing is possible, then you’d want to see the kind of data inflows we’ve seen so far,” said Art Hogan, chief market strategist at B Riley Wealth. “High employment numbers and lower inflation would both be important inputs to this theory.”

Until recently, optimism was hard to come by. Last month, stock positioning was in the 12th percentile of its range since January 2010, according to a July 29 note from Deutsche Bank analysts, and some market participants attributed the big jump in stocks to investors who quickly unwound their bearish bets.

With stock market swings falling to multi-month lows, additional support for stocks could come from funds that track volatility and turn bullish as market swings abate.

Volatility-targeted funds could absorb about $100 billion of equity exposure in the coming months if fluctuations remain small, said Anand Omprakash, head of quantitative derivatives strategy at Elevation Securities.

“If their allocation were to increase, it would provide a tailwind for stock prices,” Omprakash said.

Next week, investors will be watching retail sales and housing data. Earnings reports are also expected from a number of major retailers, including Walmart and Home Depot, which will renew understanding of consumer health.

Much apprehension remains in the markets, with many investors still bruised by the 20.6% drop in the S&P 500 in the first six months of the year.

Fed officials pushed back on expectations that the central bank would end its rate hikes sooner than expected, and economists said inflation could return in coming months.

Some investors were alarmed at how quickly risk appetite rebounded. ETF Ark Innovation, one of the main victims of this year’s bear market, has climbed around 35% since mid-June, while shares of AMC Entertainment Holdings, one of the “meme stocks” original, doubled during this period.

“You’re looking through assets right now, and you don’t see a lot of priced risk in the markets anymore,” said Matthew Miskin, co-head of investment strategy at John Hancock Investment Management.

Keith Lerner, co-chief investment officer at Truist Advisory Services, believes technical resistance and soaring stock valuations will likely make it difficult for the S&P 500 to advance well past the 4,200 to 4,300 level. The index was at 4,249 Friday afternoon.

Seasonality can also play a role. September — when the Fed holds its next monetary policy meeting — was the worst month for stocks, with the S&P 500 losing an average of 1.04% since 1928, according to Refinitiv data.

Wall Streeters taking a vacation throughout August could also drain volume and stoke volatility, Hogan said.

“Lighter liquidity tends to exaggerate or exacerbate moves,” he said.

Updated: August 14, 2022, 03:30

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