U.S. markets have had a mostly lousy year as soaring inflation, rising interest rates, war in Ukraine and the coronavirus pandemic have rattled investors and weighed on corporate profits. Until Friday’s close, Dow had fallen for eight consecutive weeks, while the broader S&P 500 index and Nasdaq had declined for seven straight.
The downturn on Wall Street marks a brutal reversal from the exuberance that powered the market through the first two years of the coronavirus pandemic. Investors now face a more dispirited economic environment without robust government support. And while market observers appear less focused on monitoring covid-19 infections, they have turned their attention to other metrics, like inflation data and consumer spending, which are difficult to predict but can fuel abrupt swings in share prices and sour sentiment.
The markets are now on an upswing, with the S&P 500 up 6.6 percent for the week, the Dow up 6.2 percent and the Nasdaq 6.8 percent. The gains also head off immediate worries the S&P 500 will take on the bear market label — defined as a 20 percent drop from the most recent high. The broad index has close in recent sessions, and even briefly found itself there in intraday trading last week.
Wall Street continues to scrutinize the actions of the Federal Reserve, which is expected to raise interest rates several more times this year to ease inflation. “The Fed is walking a tight rope as it looks to increase interest rates enough to cool down the economy and achieve price stability, but not so aggressively that it pushes the economy into a recession,” said Nicole Tanenbaum of Chequers Financial Management. “The jury is still out as to whether it will be able to achieve this so called ‘soft landing’ and investors broadly are pricing in a less rosy scenario.”
The past week has had all the hallmark signs of a bounce-back rally, according to Wayne Wicker of MissionSquare Retirement. Some of the worst performing stocks of the past 12 months have been among the best performers the past two days, and by a wide margin, he says.
Corporate earnings were a mixed bag Friday. Computer giant Dell Technologies saw its shares jump almost 13 percent after releasing first-quarter sales results that exceeded analysts’ expectations.
Retailers specifically have seized Wall Street’s attention as analysts look for signs that consumer spending may be flagging. Walmart and Target both posted disappointing quarterly results last week, both citing rising costs and supply chain challenges biting into profits. Retailers’ financial results also may herald red flags for the economy, especially if they show consumers are changing their habits to offset higher gasoline and grocery prices.
Gap initially plunged 6.5 percent after the apparel company posted a revenue decline but finished up 4.3 percent for the day. Costco, which reported double-digit revenue growth after the markets closed Thursday, edged up 1.2 percent Friday. While the warehouse club also reported heightened freight and labor costs and said it would raise prices on some foods, it also said its customers for the most part are not reaching for cheaper versions of the goods they prefer.
Consumer spending accounts for more than two-thirds of the economic activity in the U.S.
Analysts see positive news in recent inflation data. The core personal expenditures index, the Fed’s favored gauge of inflation, rose 4.9 percent from a year ago in April, reflecting a deceleration from March.
“Inflation is finally slowing, but it’s a little early for high fives,” said Comerica Bank chief economist Bill Adams, who noted that gas and food prices continued to rise in May. There is also the threat of continued oil-market disruption from the war in Ukraine, or more supply chain shocks due to China’s efforts to fight covid. “Rising prices will probably continue to be a big problem for the U.S. economy for at least the rest of the year,” Adams said.
FWDBonds chief economist Chris Rupkey says consumers appear to be dipping into their savings to weather the effects of inflation, he said, but it remains to be seen how long they can do so.
“The economy can always turn on a dime, but at this point in the economic cycle, consumers are still spending their hearts out, keeping the recessionary winds at bay,” Rupkey said in an email.
Oil prices have settled just above $115 per gallon, as measured by West Texas Intermediate crude, the U.S. benchmark. Fuel prices are near record highs; the average price of a gallon of unleaded gas in the U.S. stood at $4.59 per gallon Friday, according to AAA.
On Friday, President Biden called the decline in inflation a sign of progress while acknowledging there was more work to be done to bring prices under control. “My plan is to give The Federal Reserve the independence it needs to do its job, lower families’ costs, and lower the federal deficit,” he said, adding that tackling inflation is his top economic priority.
While the major indexes pulled out a victory this week, they are all still negative for the year, with the Dow off 8.6 percent, the S&P 500 down 12.8 percent and the Nasdaq 22.5 percent.
Markets will be closed Monday in observance of Memorial Day.
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