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U.S. Stocks Rally On Strong Economy And Subsiding Inflation

U.S. stocks closed firmly higher as recent data shows the economy thriving and inflation subsiding. The soft-landing story is giving confidence to investors even with the risk of higher interest rates. 

Thursday saw the market dip on fears of the Bank of Japan (BOJ) allowing rates to go higher. Additionally, with the recent Fed hike and hawkish statements from other central banks, yields spike rapidly with the 10-year closing in on 4% and 2-year at 5%. 

However, all that completely reversed on Friday when the Fed’s preferred inflation gauge, the personal consumption expenditures price index, rose by 3% from a year earlier in June, marking the smallest increase in over two years.  

Core Prices, which exclude food and energy and are regarded as a more reliable signal of underlying inflation, advanced by a less-than-expected 4.1%, also the lowest since 2021. 

Taken together with the stronger than expected GDP of 2.4% and stronger than expected consumer spending of 1.6%, people are starting to use the term “Goldilocks scenario” more and more. 

For the week the Dow was up by 0.7% the S&P up by 1.0% and the Nasdaq up by 2%. 

Here are the closing levels for Friday, 28th July 2023: 

 Last Change %Change 
Dow Jones 35,459.29 +176.57 +0.50% 
S&P 500     4,582.23 +44.82. +0.99% 
Nasdaq Comp14,316.66 +266.55. +1.90% 
U.S. 10Y   3.95%   
VIX 13.33 -1.08 -7.49% 

As expected, it was a volatile week, but at the end of the day, we remain in risk-on mode. 

This market is not going to let anything stand in its way. Higher interest rates and further rate hikes are not scaring them away. 

Recession calls have virtually disappeared, with investors continuing to pour in funds. Shorts have capitulated, underweight portfolios have been reversed, and cash is no longer considered king. 

The data consistently surprises the upside, making it difficult to bet against this market. The ongoing AI fever is driving tech stocks higher, and corporate earnings have mostly surpassed estimates. It seems like there’s little that could go wrong. 

Investors seem unfazed by bad news, and the confidence level remains high. Hedging downside risks has become less common in conversations. 

While this combination of factors might typically lead to a sharp pullback, it appears that we are currently far from such a scenario. For now, maintaining a risk-on approach is likely the prudent course of action. 

Source: CBOE, Bloomberg 

This commentary is written by James Gomes, a seasoned finance industry veteran with extensive experience of over 30 years, including a substantial tenure at a reputable U.S. bank exceeding 20 years.

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