Stocks Were Lifted by Less-Bad News. Now We Need Actual Good News.

The first is the consumer. Fears have begun to grow since mid-May that a consumer-led recession is brewing as inflation crushes spending power. Poor results from Walmart and Target hit their stocks and anxiety spread across the stock market, with the average retailer in the S&P 1500 falling 14% in the week to Tuesday. .

A sign of how deep economic concerns are: Stocks and Treasury yields are starting to move in the same direction again. The S&P 500 index and 10-year yields rose and fell together in the 9/10 days to last Tuesday, their highest level this year, as the focus turned to economic news (weaker economy softens yields and hit the S&P level) instead of inflation (higher inflation means higher yields, which is generally bad for stocks).

But other retailers have since posted better results, and shares of those who beat expectations skyrocketed, with Macy’s up nearly 20% in a single day. Overall, average retailer — I use average because otherwise Amazon‘S

lower market value than others — up 14% since last Tuesday. Economic data backs this up, with personal consumption spending in April higher than forecast, albeit lower than in March.

Simply put, consumer spending may be slowing, but not by as much as investors fear. The sell-off has been overdone – but uncertainty remains.

This leads to the second explanation, which is investor sentiment. The mood across the markets turned sour, worse in many surveys than the lows in 2020. When we think things are bad, it’s easier to understand that the same news is better than one. little, and that’s exactly what happened. Sentiment is always likely to get worse (it’s not as bad as the 2009 low), but the odds are that things are looking to improve.

Unfortunately, the shift in sentiment is often temporary and needs support from fundamentals, economic improvement or a change in monetary policy to last.

The third point is monetary policy, where there is little variation. Investors say the economy is slowing and signs that inflation may, perhaps, please please, have peaked, meaning fewer rate hikes will be needed. than before. There have even been some dovish-sounding proposals from Federal Reserve officials to pause and eventually cut interest rates after a series of rapid hikes this spring and summer.

Expectations of lower rates due to a weak economy are not beneficial enough to offset the damage to equities due to the threat to profits. But expectations of lower interest rates as the Fed is changing the way it reacts is great for stocks, as they mean easier money without any threat to the economy. . This has helped stocks in general perform well, while those that are most sensitive to bond yields, high-growth stocks with low returns, have outperformed. ARK Innovation, a fund comprised of loss-making growth stocks, is up 16% since Tuesday.

Can all of this last?

The consumer shift is really just an evaporation of bad news, not real good news. Consumers are digging into their ample savings, which helps but can’t go on forever; At some point, wages must increase enough to sustain spending, without further increasing inflation. Sentiment has a lot to go, which may help some momentum, but by itself is not the basis for a long-term recovery.

There may be a glimmer at the end of the tunnel when it comes to the Fed, but words are cheap, and it will be a long time before we know if the Fed is really prepared to brighten up the stock market.