Consumers may be concerned about inflation and rising interest rates. But don’t tell that to Wall Street.
Stocks rose again on Tuesday, putting the market on track for a third straight day of gains in what has been a very bullish October. The Dow rose nearly 300 points, or 0.9%. Blue chips are up more than 10% this month.
The S&P 500 and Nasdaq also had strong gains on Tuesday, rising 1.3% and 2% respectively.
So why is the market in rally mode, even though consumers are concerned about rising prices for almost everything? There are two main reasons.
For one thing, earnings are still pretty good. GM ( GM ), Coca-Cola ( KO ) and UPS ( UPS ) were among the iconic American companies that reported strong third-quarter earnings and sales on Tuesday. So even though consumers and businesses may feel bad every time they buy something and see how much it costs… they’re still spending.
Until declining consumer confidence and high inflation hurt demand, then corporate earnings…and therefore stocks…could hold.
There’s another factor at play, and one that’s a bit more intuitive. The relentless drumbeat of scary economic news – housing slowdown headlines, inflation fears, geopolitical worries and recession worries – could lead the Federal Reserve to slow the pace of interest rate hikes.
Investors are hoping that’s true, as the central bank worries that too big a rate hike will push the economy into a deep and prolonged recession.
The Fed has raised three-quarters of a percentage point in its last three meetings in its fight against inflation, and the central bank is expected to do so again at its next meeting on Wednesday, November 2, but after that. that, all bets are off.
And while Wall Street expects the nation’s gross domestic product, the broadest measure of the economy, to grow when third-quarter data is released Thursday, recession alarms continue to sound.
The housing market is starting to pull back as mortgage rates have risen. Manufacturing growth has slowed. CEOs are nervous about more regulations hurting growth in Washington. And rising energy prices could dampen consumer demand.
Because of this, there is growing hope that if the economy starts to show more signs of weakness AND inflation finally cools a bit, the Fed could raise rates by half a point in December.
Additionally, the Fed could hold off on further rate hikes until 2023 while it waits to see what impact the current rate hikes have on the economy. Some on Wall Street are betting that the Fed could reverse course and start cutting rates again next year if rate hikes go too far and send the economy into recession.
Investors seem to be playing the long game. Stocks are already down in 2022 on expectations of rate hikes and a possible slowdown in the economy and earnings this year and in the first half of 2023.
But if the worst of inflation and rate hikes are truly over by the second half of next year, then it makes sense for Wall Street to bet on it. A famous saying about Wall Street is that markets are forward-looking.
So, even though consumers are dealing with what appears to be a bleak economic environment today, investors are already anticipating (hopefully) happier times in late 2023 and 2024.