Consumers can be worried about inflation and rising interest rates. But don’t tell Wall Street.
Stocks rose again on Tuesday, putting the market on track for a third consecutive day of earnings in what turns out to be a very bullish October. The Dow increased by nearly 300 points, or 0.9%. Blue chips have now rallied more than 10% so far this month.
The S&P500 and Nasdaq also posted strong gains on Tuesday, up 1.3% and 2% respectively.
So why is the market in rally mode as consumers worry about rising prices for just about everything? There are two main reasons.
On the one hand, revenues are still quite good. GM
(NOPE) and inverter
(UPS) were some of the iconic U.S. companies to report strong third-quarter earnings and sales on Tuesday. So even though consumers and businesses may feel bad every time they buy something and see how much it costs…they keep spending.
Until declining consumer confidence and high inflation hurts demand, so corporate earnings…and therefore stocks…can hold up.
There’s also another factor at play, and one that’s a bit more counterintuitive. The relentless drumbeat of scary economic news – housing downturn headlinesinflation fears, geopolitical concerns and recessionary jitters – may lead the Federal Reserve to slow down the pace of rising interest rates.
Investors hope that’s true because they fear that overly aggressive rate hikes from the central bank could push the economy into a deep and prolonged recession.
The Fed has increased rates by three-quarters of a percentage point at each of its last three meetings in its fight against inflation, and the central bank is expected to do the same at its next meeting on Wednesday, November 2. But after that, all bets are off.
And even though Wall Street expects the nation’s gross domestic product, the economy’s broadest measure, to have risen in the third quarter when the data comes out Thursday, recessionary alarm bells continue to ring. ring.
The housing market is beginning to pull back as mortgage rates have soared. Manufacturing Growth slowed down. CEOs are nervous about more regulations in Washington that hurt growth. And rising energy prices could dampen consumer demand.
That’s why there’s growing hope that if the economy starts to show more signs of weakness AND inflation eventually subsides a bit, the Fed might raise rates by just half a point in december.
Additionally, the Fed could pause rate hikes in 2023 while we wait to see what impact existing rate hikes have on the economy. Some on Wall Street are even betting that the Fed could reverse course and start cutting rates again later next year if it turns out that rate hikes have gone too far and sent the economy into recession.
It looks like investors are playing the long game. Stocks have already plunged in 2022, in anticipation of rising rates and a possible economic and earnings slowdown this year and in the first half of 2023.
But if the worst of the fallout from inflation and rate hikes is really over by the second half of next year, then it makes sense for Wall Street to bet on it now. The famous saying about Wall Street says that markets are looking to the future.
So while consumers are lingering over what certainly looks like a lackluster economic environment right now, investors are already (hopefully) banking on happier times in late 2023 and 2024.