An Expected Soft Landing Fuels Stock-Market Rally

MONDAY, NOVEMBER 20, 2023

◈ An Expected Soft Landing Fuels Stock-Market Rally

 

Wall Street believes its soft-landing dream is on the verge of coming true. That is prompting a fresh wave of demand for stocks.

 

Markets have rallied since last week’s consumer-inflation report came in softer than expected. Many analysts and portfolio managers expect the gains to pick up heading into year-end, reflecting a sense that markets have faced down their most significant challenge: the potential for rising bond yields to crimp economic activity, reduce demand for stocks and send the U.S. economy into recession.

 

Stocks appear again on an upswing, extending a renaissance that began this month when Treasury Secretary Janet Yellen eased fears about a bond-market rout by tweaking U.S. debt-issuance plans. The S& P 500 rose 2.2% over the past week, capping the index’s best three-week stretch since June 2020 and putting it up 18% for the year. A torrent of buying in Treasurys has sent benchmark yields down to 4.441%, easing persistent concerns about whether rising financing costs will hamper U.S. growth.

 

This week, investors will be parsing minutes from the central bank’s last meeting for clues on the Federal Reserve’s continuing effort to contain prices. A series of cooler-than-expected inflation readings have taken another 2023 rate increase off the table, in the market’s view.

 

Many investors now expect the economy to cool enough for the Fed to begin reducing interest rates next year, without prompting a dramatic slowdown in consumer spending or a sharp contraction in the workforce. That should create optimal conditions for buying stocks, investors said.

 

“We’re in a mini Goldilocks scenario,” said Alessio de Longis, senior portfolio manager at Invesco, who said he is preparing for larger stock gains ahead. “The soft landing is playing out.”

 

The signs so far have been encouraging. Consumer-price inflation cooled more than expected in October, continuing a steady fall. A measure of producer prices fell 0.5% in October, the biggest drop since April 2020—before inflation started crimping Americans’ wallets.

 

S& P 500 companies are on track to increase profits for the first time in a year.

 

Jawad Mian, founder of Stray Reflections, a macroeconomic advisory firm, expects the Fed to start cutting rates next year and for stocks to continue their ascent, drawing in some of the investors who had kept an outsize chunk of their portfolios in cash.