Summer is a time to kick back and enjoy the sunshine. The stock market may be coming around to that idea.
No doubt, it’s been hard to feel comfortable in recent months, as households and businesses continue to feel the sting of inflation, headlines about layoffs at large companies make workers worry about job security, and fears of recession loom large. Lost amid these challenges has been a string of good news.
After months of haggling, Congress came to an agreement on the debt ceiling, averting a default that could have roiled financial markets. Elsewhere, the Labor Department said that 339,000 jobs had been added to the economy in May, coming in well ahead of the 186,500 jobs forecast by analysts.
And for once, good news was good news, as the stock market stopped fretting about how the Federal Reserve might react, thanks to an unemployment rate that ticked up to 3.7% from 3.4% and slowing wage growth.
It was enough for a market party—and this time everyone was invited. The
S&P 500 index
climbed 1.8% on the week, while the
Dow Jones Industrial Average
and
Nasdaq Composite
both advanced 2%.
Even better, all sectors of the market are participating in the recovery, a shift from the first five months of the year, which saw the S&P 500 gain 9% even as eight of the market’s 11 sectors, including energy and utilities, dropped. That dynamic changed after the House passed the debt deal Wednesday night, setting it up for easy passage in the Senate.
On Thursday, data from the Institute for Supply Management showed that manufacturing contracted for the seventh straight month but that the prices manufacturers had to pay for their inputs had fallen.
“Economic data on Thursday was positive for stocks and bonds because it showed a sudden drop in some inflation metrics while growth stayed largely stable, and that’s essentially the Goldilocks economic scenario for stocks, at least initially,” Tom Essaye, founder and author of the Sevens Report, wrote on Friday.
With economic data looking good—but not too good—Wall Street is feeling confident that the Fed’s Open Market Committee will pass on hiking rates at its meeting later this month. Few expect a full pivot, but in light of cooling inflation and recent turmoil at banks causing the sector to restrict lending, the Fed may want to wait out this round of hikes to let its efforts continue to work through the economy.
It may also want to see whether the signs of stress on lower-income consumers that have shown up in disappointing earnings from
Dollar General
(ticker: DG) and rising credit-card delinquencies in the New York Fed’s consumer credit data morph into something worse. Wall Street still largely expects the Fed to pause, with odds of no hike standing at 68% this past Friday, according to the CME FedWatch Tool, and who are we to argue?
Heck, if the Fed is willing to relax, maybe investors should too.
Write to Carleton English at carleton.english@dowjones.com
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