Bullish sentiment returned to Wall Street last week, with all major stock averages closing significantly higher, helping make July its best month since 2020.
Bulls in stock markets were led by several factors, including Apple and Amazon’s earnings, which beat analysts’ downgraded expectations. They confirmed that these tech giants could survive and thrive in a challenging environment of rising inflation and interest rates.
Then there was a much-anticipated base hike of 75 points in the fed funds rate, reassuring Wall Street that the country’s central bank is serious about getting inflation under control. At the same time, Chairman Jerome Powell’s dovish tone raised expectations of a quick end to rate hikes.
“The Fed’s 75 basis point hike in interest rates was fully anticipated,” Robert R. Johnson, an economics professor at Creighton University, told the International Business Times in an email. “What was not expected was Powell’s more dovish comments in his post-announcement press conference. Market participants were pleasantly surprised when Powell said that “current interest rates are close to neutral.” Those comments pushed shares higher as investors believed interest rates might not need to rise much further despite historically high inflation numbers. While last month’s inflation numbers were hot, July’s numbers should be significantly lower as oil and other commodity prices have recently fallen.”
And there was the interim GDP report for the second quarter of 2022, which showed the economy contracted 0.9% qoq, while core PCE was at 4.4%, compared to 5.2% in the previous month first quarter.
These numbers supported the thesis that the economy is starting to correct itself for inflation and that the Fed could be pretty much done with raising rates. As a result, government bond yields fell, which supported the rally in risky assets.
In addition, a euro zone report showed that the euro economy continues to grow despite rising inflation and the Russo-Ukrainian war. The region’s gross domestic product (GDP) grew by 0.7% in the first quarter of 2022, beating expectations of a 0.2% increase. And that helped the euro regain some ground it had lost against the dollar over the past few weeks.
This also appealed to stock traders and investors. A growing eurozone makes it less likely that the global economy will enter a synchronous recession, which could hurt profits at corporate giants with significant exposure to overseas markets. In addition, the weakening of the dollar raised hopes of a favorable translation of future earnings for these companies.
Still, bullish sentiment on Wall Street is likely to be tempered by multi-year high inflation, which will require further rate hikes from central banks around the world, both on the short- and long-term side of the yield curve. And that could hurt corporate earnings in interest-rate-sensitive sectors, including the energy and materials sectors that led the rally as the pandemic lockdowns ended.
Additionally, rising interest rates and drying up of liquidity could take their toll on risky assets such as smaller profitless companies traded on the NASDAQ and cryptocurrencies that have no intrinsic value.
https://www.ibtimes.com.au/bullish-sentiment-returns-wall-street-how-long-will-it-last-1836167?utm_source=Public&utm_medium=Feed&utm_campaign=Distribution Bullish sentiment is returning on Wall Street, but how long will it last?