Consumers may be worried about inflation and rising interest rates. But don’t tell Wall Street that.
Stocks climbed again on Tuesday, prompting the market for a third-straight day of gains, which have been rising sharply in October. The Dow was up nearly 300 points, or 0.9%. Blue chips have jumped more than 10% so far this month.
The S&P 500 and Nasdaq were also playing solid gains on Tuesday, rising 1.3% and 2%, respectively.
So why is the market in rally mode while consumers are worried about the rising price of everything? There are two main reasons.
For one, earnings are still great. GM, Coca-Cola (KO) and UPS were some of the reputed US companies that reported strong profit and sales for the third quarter on Tuesday. So even though consumers and businesses feel lousy every time they buy something and see how much it costs… they’re still spending.
Unless consumer confidence plummets and high inflation actually hurts demand, corporate profits … and therefore stocks … may hold.
There is another factor at play as well, and one that has a bit more upside. The relentless drumbeat of scary economic news — headlines of the housing recession, inflation fears, geopolitical concerns and recession panic — could prompt the Federal Reserve to backtrack on the pace of interest rate hikes.
Investors are hoping this is true because they are concerned that overly aggressive rate hikes by the central bank will send the economy into a deep and protracted recession.
The Fed has increased its fight against inflation by three-quarters of a percentage point in each of its three previous meetings, and the central bank is expected to do so again at its next meeting on Wednesday, Nov. But after that, all bets are off.
And even though Wall Street expects the nation’s gross domestic product, the broadest measure of the economy, to rise in the third quarter when the data is released on Thursday, recession bells will continue to ring.
The housing market is starting to pull back as mortgage rates rise. Manufacturing growth has slowed. CEOs are nervous about more regulations in Washington affecting growth. And rising energy prices could reduce consumer demand.
So there are growing hopes that, if the economy starts showing more signs of weakness and inflation eventually calms down a bit, the Fed could raise rates by only half a point in December.
What’s more, the Fed may hold off on raising rates further in 2023 as it waits to see how the current rate hike is affecting the economy. Some on Wall Street are also betting that the Fed could reverse course and start cutting rates at the end of next year if it finds that rate hikes have gone too far and send the economy into recession. Gave.
It looks like investors are playing the long game. Stocks have already plunged into 2022 in anticipation of a rising rate environment and a possible economic and earnings slowdown this year and the first half of 2023.
But if the worst of inflation and rate hikes is truly over by the second half of next year, it makes sense for Wall Street to bet on that now. The famous saying about Wall Street is that the markets are looking forward.
So even though consumers are currently banking on what looks like a gloomy economic climate, investors are already banking on (hopefully) happy times in the end of 2023 and 2024.