Investors finally got the inflation reading they were looking for, and are likely to get a split government for the next two years. That combination propelled stocks to their best weekly showing since June. On Friday, the
S&P 500
even briefly crossed the 4,000 threshold, a level it hadn’t breached in two months.
The S&P ended the week 5.9% higher, closing just below 4,000. The
Dow Jones Industrial Average
rose 4.1%, and the
Nasdaq Composite
jumped 8.1%. It was the best weekly showing for the Nasdaq since March, and it came during a week when tech news seemed largely negative. Facebook parent
Meta Platforms
(ticker: META) announced that it will cut 11,000 jobs, the latest in a wave of Silicon Valley layoffs. The best thing Facebook can say for itself now is that it isn’t Twitter.
Most of the week’s gains came on Thursday, when the October consumer price index rose 7.7% on an annual basis. While still much higher than the average over the past decade, it was below September’s 8.2% and undershot Wall Street expectations of 8%. Excluding food and energy, core inflation rose 0.3% on a monthly basis, below expectations for 0.5%.
Fundstrat’s Thomas Lee called the data a “game changer” that could support a rally through year end. In fact, he thinks markets could rally as they did the last time an inflation shock ended. “Recall, in 1982, following the final low in August 1982, the S&P 500 reached a new all-time high within four months, erasing [the] entire 27-month bear market,” he wrote. “That was a vertical rally.”
Others are less convinced. “You would have thought something monumental happened that changed the backdrop, and I don’t think that’s the case,” says Jonathan Golub, Credit Suisse’s chief U.S. equity strategist. “Listen, I’m a pretty bullish guy, but I’m not seeing something that justifies a 6% move.”
Golub thinks the CPI’s relevance this month was similar to prior months’—the numbers were just a couple of percentage points away from estimates and not enough on their own to change the trajectory of the economy or monetary policy. The outsize move for stocks reflected the market’s “coiled spring” posture ahead of every inflation report this year. Investors have been on edge for CPI releases, with stocks moving an average of 2.8% on the day of the past seven releases, Golub notes.
He thinks inflation is likely to stick around, because the labor market remains tight, exerting upward pressure on wages. There are about twice as many job openings as there ought to be at this stage of the economic cycle. He still expects the market to rise by the end of next year, but would “fade the rally” if he were a short-term trader.
Tuesday’s election was a secondary factor. The GOP underperformed expectations, but is likely to take control of the House. The Senate race was too close to call by week’s end. Split government tends to be good for stocks, lowering chances of big changes to laws and regulations affecting businesses. The election caused outsize moves in a few stocks. Notably, gambling shares fell after Californians voted down a proposal to allow sports betting in the state.
Write to Avi Salzman at avi.salzman@barrons.com
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