Wall Street’s Best Day in Six Weeks

Friday’s rally sent Wall Street to its best day in six weeks. The S&P 500 rose 1.6% to cap its first winning week in the last four, as relaxing bond yields took some pressure off the market. The Dow Jones Industrial Average climbed 387 points, 1.2%, while the Nasdaq composite jumped 2%.

What’s Moving the Markets?

The central guidepost moving markets recently has been where inflation is heading and what the Federal Reserve will do about it. Early in the year, hopes of cooling inflation led to a rally on Wall Street with the anticipation of the Fed taking it easier on its hikes to interest rates. Such increases can drive down inflation by slowing the economy, but they also raise the risk of a recession later and hurt investment prices.

Last month, however, momentum swung as stocks fell after reports on the economy came in hotter than expected. They included data on the jobs market, consumer spending, and inflation itself at multiple levels. The strong data raised concerns about continued upward pressure on inflation. That forced Wall Street to abandon hopes for rate cuts this year and raise its expectations for how high rates would go.

On Friday, more data showed that the economy is in better shape than thought: growth for services industries last month was a touch stronger than economists expected. That’s a good sign for the economy and helps calm worries about an imminent recession, particularly when manufacturing has struggled. But it also could add pressure on inflation.

Takeaways for Investors

Despite the good news, Amanda Agati, Chief Investment Officer of PNC Asset Management, sees the Fed having to take interest rates even higher than the market expects because of how stubborn inflation has been. With corporate profits on the way down and her expectation for even more declines because of a mild to moderate recession, she sees the stock market grinding lower before plateauing for a while and then gradually rising again, reminiscent of the shape of a bathtub.

“It’s going to be a more extended tightening cycle,” Agati said. “Investors are so conditioned to high volatility and warp speed they want everything to happen immediately. So you see the market trying to price it in one shot. It will take longer for the Fed to get out of the driver’s seat.”

Related Facts

• The yield on the 10-year Treasury fell back to 3.96% from 4.06% late Thursday.
• Prices are still rising for prices paid by services organizations, but the growth decelerated in February.

Key Takeaway

The stock market is hopeful for this week, but investors must factor in inflation and interest rates. Any sudden rise could create problems in the market, which could take a long time to recover. Not everything is a bed of roses, and rocky terrain could still be ahead.

Conclusion

The stock market’s rally on Friday was a welcome sight for investors, but it’s not time to rest on our laurels. With inflation on the horizon, investors must be careful and closely monitor the situation.