Can a Stock Market Comeback be Sustained?

So let’s tackle the first question. It’s hard to divine exactly what caused the rally, but I believe it was a combination of factors. At the start of the week, we got news that the Biden administration is considering rolling back some of the Trump-era tariffs on Chinese goods.³ Tariffs were never a good thing for the US economy, in my view, and while they’re not a major source of inflation, every little bit counts. So I believe this rightly improved investor sentiment.

Then there was the triad of major CEOs — JPMorgan Chase’s Jamie Dimon, Citigroup’s Jane Fraser, and Bank of America’s Brian Moynihan — who said at the World Economic Forum in Davos that the US economy is in good shape, that the labor market is tight, and that the US will likely avoid a recession.⁴ I believe that certainly helped to support positive sentiment.

Then came the Federal Open Market Committee minutes, which most observers viewed as rather dovish. The Federal Reserve (Fed) recognized that their tough talk has done some of the heavy lifting for them, with financial conditions already having tightened meaningfully. The minutes show a Fed that is anticipating a “double-double play” — 50 basis point hikes at the next two meetings — and then an assessment of where the Fed would go next, which could lead to a less aggressive tightening path from there. In other words, the Fed would be “data dependent” — which I believe is so critical to their being able to engineer a “soft landing.” Now, there are some more hawkish voices at the Fed — for example, Cleveland Fed President Loretta Mester said earlier this month that if inflation failed to “moderate” by September, then “a faster pace of rate increases may be necessary.”⁵ But that seems to be the minority view, at least for now.

We also heard from some US retailers who offered a more positive view of the US economy than some of their peers who reported previously. It turns out that some US retailers are continuing to see customers spending robustly, while other retailers are able to manage despite increasing pressures.

Then there were the signs that US inflation could be peaking or has already peaked. The Fed’s preferred measure of inflation, core personal consumption expenditures, rose 4.9% year over year for April, down from 5.2% the previous month.⁶ It’s still very high, but moving in the right direction.

But this was not a US-only rally. European stocks also posted an impressive gain for the week. In her blog, European Central Bank President Christine Lagarde indicated her plans to incrementally take rates out of negative territory by the end of September. Sentiment was also helped by Eurozone flash Purchasing Managers’ Indexes (PMI). They indicated a rather resilient European economy despite the pressures of the Russia-Ukraine war.

And the rally wasn’t confined to equities. In fact, global bonds have been rallying in recent days. Some of this move has been driven by the view that central bank rate hikes have largely been priced in already. In addition, yields in many fixed income sub-asset classes are looking far more attractive than they did just a few months ago.

One market that didn’t rally last week was Chinese equities, although performance in the past month has been strong.⁷ That may be an initial reaction to comments from China’s Vice Premier Li Keqiang. One statement in particular hung over Chinese stocks like a lead balloon: “Economic indicators such as employment, industrial production, power consumption and freight have fallen significantly. The difficulties in some aspects, and to a certain extent, are greater than those experienced in 2020 when the epidemic hit the country severely.”⁸ Investors seem to forget that China recovered very quickly economically in the initial stages of the pandemic, so I am not surprised that the Chinese economy would be more negatively impacted by this wave of COVID. While the last week brought disappointing returns for Chinese equities, they have been participating in a rebound in the past month.