The U.S. stock market is starting to show signs of returning optimism as some investors become more optimistic that the economy may be able to avert a serious slump even as it continues to deal with high inflation.
Since the middle of June, the benchmark S&P 500 has gained almost 15%, which has cut in half its loss for the year to date. Meanwhile, the tech-heavy Nasdaq Composite has gained 20% over this same period.
Many of the so-called meme stocks that had been pounded in the first half of the year have made a roaring comeback, while the Cboe Volatility Index, also known as Wall Street’s fear barometer, is hovering near a low point not seen in nearly four months.
According to a study conducted by the American Association of Individual Investors this past week, bullish sentiment reached its greatest level since March.
This level was the highest it had been since March. At the beginning of this year, that indicator fell to its lowest level in nearly 30 years, as a result of a decline in stock prices brought on by concerns regarding the impact that the Federal Reserve’s monetary tightening would have on the economy.
“We have experienced a fair amount of pain, but the viewpoint in how people are trading has shifted radically towards a glass half full as opposed to a glass half empty,” said Mark Hackett, who is the chief of investment research at Nationwide. “We have experienced a fair amount of suffering.”
The data that was collected over the past two weeks gave rise to renewed optimism over the Federal Reserve’s ability to guide the economy to a gentle landing. Inflation figures released this week revealed the sharpest month-on-month decrease in consumer price increases since 1973.
While last week’s robust jobs report allayed fears of a recession, the numbers released this week showed that inflation is slowing down.
The shift in market sentiment was reflected in data that was released by BofA Global Research on Friday: tech stocks saw their largest inflows in around two months over the past week, while Treasury Inflation-Protected Securities, or TIPS, which are used to hedge against inflation, notched their fifth straight week of outflows. Both of these trends were reflected in the market over the past week.
According to Art Hogan, the chief market analyst at B. Riley Wealth, “If in fact, a soft landing is feasible, then you’d want to see the kind of data inputs that we have seen thus far.”
“A robust jobs number, as well as falling inflation, would both be crucial inputs into that theory,” you say.
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The Standard & Poor’s 500 Index had gained 1.5% for the week as of Thursday’s close, putting it on track for its fourth consecutive week of gains.
There has been a recent uptick in the availability of optimism. According to a note published on July 29 by analysts at Deutsche Bank, equity positioning in the previous month stood in the 12th percentile of its range since January 2010.
Additionally, some market participants have attributed the significant increase in stock prices to investors rapidly unwinding their bearish bets.
According to Anand Omprakash, head of derivatives quantitative strategy at Elevation Securities, volatility targeting funds could potentially suck up approximately $100 billion in equities exposure in the coming months if gyrations stay modest.
