Has Inflation Passed Away? Stocks Keep Climbing as Price Gains Slow

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Stocks just had their longest winning streak of the year as inflation cooled and investors plowed cash back into the market.

The S&P 500 rose 3.3 percent between Friday, August 5, and Friday, August 12. It was the index’s fourth straight weekly gain, its longest consecutive advance since rising for five straight weeks in October and early November. The rally was broad, with 90 percent of the benchmark’s members climbing and every major sector showing a positive return.

The consumer price index (CPI) was unchanged in July versus June, less than the 0.2 percent increase forecast by economists. It was first month since March that inflation missed estimates. Producer prices were also below consensus. While falling energy prices were the main cause of improvement, lower transportation and used-vehicle costs suggested broader progress in the battle against inflation.

The news further melted a glacier of negativity that took shape earlier in the year as inflation soared and the Federal Reserve tightened monetary policy. The pendulum could now be swinging in the opposite direction as investors scramble for exposure to stocks and other risk assets. At least three other patterns seem to show this improvement.

Risk Appetite

First, TradeStation data showed that 461 members of the S&P 500 closed above their 50-day moving averages on Friday. It was the highest reading since April 2021.

Biggest Gainers in the S&P 500 Last Week
Nielsen (NLSN)+20%
Albemarle (ALB)+18%
Principal Financial (PFG)+17%
Devon Energy (DVN)+16%
Viatris (VTRS)+14%
Source: TradeStation Data

Second, risk-on benchmarks like the Nasdaq-100 and Russell 2000 closed at their highest levels since mid April. Indexes with more conservative profiles, like the Dow Jones Industrial Average and S&P 500, are only back to their highest points since May.

Third, Cboe’s volatility index (VIX) dropped for the eighth straight week. Periods of calm have followed similar declines in the so-called “fear index.” (For example, November 1992 and February 2019.)

M&A Coming Back?

A rebound in merger activity could be another sign of market conditions improving. Bloomberg reported on Friday that almost $63 billion of takeovers have been announced this month, the most since November 2021.

Other news last week was mostly positive. Initial jobless claims were lower than expected for the first time since the beginning of June. Consumer sentiment beat expectations as slower inflation instilled confidence among lower-income Americans. The New York Fed’s survey of consumer expectations showed price worries easing further. Fuel-price tracker GasBuddy also said gasoline prices dipped under $4 per gallon for the first time since March.

S&P 500 index, showing key technical events mentioned in this article.

Charting the Market

The S&P 500 is now above a resistance level from early June. Traders may next watch the 4300 area where the index peaked in late April and early May.

In addition to the risk-on metrics cited above, some other indicators may show widening strength. First, the Advance/Decline Line rose to its highest level since January — even with the broader index 9 percent below its price at that time. Second, the Relative Strength Index (RSI) jumped above 70 for the first time since November. While that can suggest a near-term overbought condition, it can also reflect a longer-lasting bullish turn.

Biggest Decliners in the S&P 500 Last Week
Moderna (MRNA)-8.4%
Illumina (ILMN)-6.9%
Tyson Foods (TSN)-6.5%
Warner Brothers Discovery (WBD)-6.2%
KLA (KLAC)-3.7%
Source: TradeStation Data

Intermarket analysis, which uses other charts to assess the broader market, could provide at least two signals as well. First, the Dow Jones Transportation Average closed above its 200-day moving average while other benchmarks are still below their 200-day moving averages. (Dow Theory may consider that a potential “bullish confirmation,” despite fears of a recession.)

Second, the 10-year Treasury yield remained below its July peak. That’s potentially important because the early 2022 spike in yields triggered the S&P 500’s plunge into bear-market territory. Lower rates could now calm sentiment, especially for higher-multiple growth stocks.

The Week Ahead

This week is quieter, with a handful of earnings and minutes from the last Fed meeting on Wednesday. Homebuilders could also active with several important housing reports due.

NAHB’s homebuilder sentiment index is the main item today.

Housing starts and building permits follow tomorrow morning, along with results from Walmart (WMT) and Home Depot (HD).

Wednesday morning brings retail sales and crude-oil inventories. Fed minutes at 2 p.m. ET could also be an important item as investors assess the central bank’s interest-rate plans. The big earnings include Target (TGT), Lowe’s (LOW), TJX (TJX) and Cisco Systems (CSCO).

Thursday features initial jobless claims and results from Applied Materials (AMAT), Estee Lauder (EL) and Kohl’s (KSS).

The week concludes with earnings from Deere (DE) on Friday morning.

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