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The stock market is expected to post the best winning streak of the year as investors are reassured by early signals that inflation is easing and the economy is holding up.

The S&P 500 rose on Friday, putting the index on track for its fourth straight positive week, a feat it hadn’t achieved since October. The index is now about 15% higher than its June low, although it remains more than 10% lower for the year.

The rally contrasts sharply with the first half of the year, when Wall Street got off to its worst start in half a century, as the war in Ukraine, soaring energy costs, rising interest rates and rapid inflation have galvanized investor fears about the health of the economy.

Federal Reserve officials have hinted that their campaign to raise interest rates to tame inflation is not yet over. But some investors see recent economic data as grounds for the central bank to act less aggressively, easing fears that higher borrowing costs could push the economy into a severe downturn.

“The peak of panic over inflation and interest rates has passed and we are looking at something not as dramatic,” said Michael Purves, founder and managing director of Tallbacken Capital.

The latest Consumer Price Index report, released on Wednesday, offered a moment of relief on Wall Street, as inflation slowed to 8.5% for the year to July, from 9, 1% the previous month. The data offered an early indication that the Fed’s attempt to lower inflation could be having an effect.

Additionally, data showing that in July the economy recovered all the jobs lost during the pandemic, along with weeks of better-than-expected corporate earnings reports, have eased some investor concerns that higher rates, which raise costs for businesses, could cut US businesses deeper.

The CBOE Vix Volatility Index, also known as Wall Street’s “fear gauge” because it reflects investors’ sense of uncertainty about stock market movements, fell below its long-term average of 20 points. this week. The Vix had remained above that mark since April, so the lower reading could be a sign that investor dismay over another decline has subsided.

“We’ve seen a succession of inflationary pressures start to reverse,” said Patrick Palfrey, senior U.S. equity strategist at Credit Suisse, adding that it’s “forced” investors to reevaluate their trade positions.

Bankers said retail investors helped fuel the rally. Sharp rises in so-called meme stocks and a slight increase in some cryptocurrencies also indicate strong participation from individual investors.

“The cornerstone of all of this is the labor market and it is rock solid,” said James Masserio, co-head of equities for the Americas at Societe Generale. “If you don’t have a job, you don’t buy meme stocks.”

Experts also said stock markets were poised to rise. Investors had reduced their bets in the market due to the uncertainty. Trading volume was also weak, with many large investors taking vacations until August. As a result, even small amounts of buying interest helped lift the market, with momentum strengthening as other investors sought yield.

More than $11 billion poured into funds that buy U.S. stocks in the week through Wednesday, according to EPFR Global, the most in eight weeks.

But some have warned that as quickly as markets recover, they could break free. Short-term gains are not unusual during periods of prolonged losses, known as bear market rallies.

After the S&P 500 peaked in October 2007, it slipped more than 50% through November 2008 following the collapse of Lehman Brothers. Then, the index increased by almost 24% in a few weeks. But the sale was not over. The S&P 500 gave up all those gains in early 2009, before hitting a low in March of that year.

Masserio said the Fed’s task of getting inflation back to its 2% target is akin to turning an oil tanker around: slow and fraught with risk.

“Fundamentally, what has built up in the system is a lot trickier than what we can fix in six months of monetary policy change,” he said, warning that the stock market woes are perhaps not not be finished yet.

Equities are higher as the inflation outlook has improved and the economic backdrop remains supportive. Although expectations are not as dour as they used to be, doubts remain as to how long the rally will last.

“I’m bullish on the market but I’m still an anxious and nervous bull,” Purves said. “We’re not off the hook yet.”


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