After two weeks of declines, U.S. stocks roared back this past week as inflation and bond yields headed lower. The rally was broad, as the picking up of M&A activity, a good retail sales report, and solid financial sector earnings aided the positive Wall Street sentiment.
The S&P 500 ended Jan. 17 shy of 6,000, up 2,91 percent for the week; the Dow Jones closed at 43,487, up by 3.69 percent; the Nasdaq finished the week at 19,630, up 2.45 percent; and the small-cap Russell 2000 was up 3.96 percent to end at 2,275.
The sharp reversal of investor sentiment from the gloom and doom of the previous two weeks began with a couple of better-than-expected inflation numbers that revived the narrative of the Federal Reserve resuming its interest rate-cutting course.
The Consumer Price Index (CPI), a measure of inflation at the retail level, followed on Wednesday. The headline number showed a monthly increase of 0.4 percent in December, slightly above the November number and the market forecasts. However, the closely followed core CPI, which excludes the volatile food and energy component from the calculations, came at 0.2 percent, below the November number and the market forecasts.
David Russell, global head of market strategy at TradeStation, sees Tuesday’s PPI numbers justifying the Fed’s early cuts last year.
“The pendulum has swung sharply in a hawkish direction since the December Fed meeting, but today’s PPI reminds people that we’re still in a period of moderating prices and falling rates,” he told The Epoch Times.
“It vindicates the Fed’s decision to ease last year and restores some hope of a second rate cut. Dropping food prices are also welcome news for the incoming Trump Administration.”
Skyler Weinand, chief investment officer of Dallas-based Regan Capital, sees Wednesday’s softer-than-expected CPI print offering some relief, especially after last Friday’s hot employment numbers, raising the passivity of further interest rate cuts in 2025.
“Even if the Fed cuts rates in 2025, it’s likely to be 6-8 months away, as we are still too far from the Fed’s inflation target for the Fed to continue their rate cut march anytime soon,” he told The Epoch Times.
“The Fed needs to see more employment and inflation prints before they can start telegraphing their interest rate plans.”
However, the bond market, gasping for positive news, couldn’t wait for that prospect. Traders and investors who had been heading for the hills in the previous two weeks got back into the game, pushing bond prices higher and yields lower for the week.
Another factor is the picking up M&A activity, which begins in almost every industry, from retailing to energy, biotechnology, and construction equipment. It helped revive interest in traditional sectors that lagged behind technology.
A third factor was solid earnings from banks and investment banking houses, including JP Morgan, Citigroup, Bank of America, Wells Fargo, and Morgan Stanley, thanks to a revival in the financial sector.
Chris Brigati, chief investment officer at SWBC, is skeptical about the prospect of further interest rate cuts this year, which sparked the Wall Street rally.
“The Fed’s dot plot calling for two rate cuts in 2025, released just a few weeks ago at the December meeting, is increasingly looking like ancient history thanks to strong labor market data,” he told The Epoch Times.
Weinand sees a challenging macroeconomic environment for stocks for the rest of the year.
“High interest rates, oil prices, and the U.S. dollar are a dangerous potion for corporate earnings this year,” he said.
“While the U.S. consumer and corporations are in a powerful position, the market may be ahead with projected earnings. We see a flat-to-down stock market in 2025 unless these pricing pressures abate.”
