NEW YORK, Aug 12 (Reuters) - Optimism is seeping back into
the U.S. stock market, as some investors grow more convinced
that the economy may avoid a severe downturn even as it copes
with high inflation.
The benchmark S&P 500 has rebounded about 15% since
mid-June, halving its year-to-date loss, and the tech-heavy
Nasdaq Composite is up 20% over that time. Many of the
so-called meme stocks that had been pummeled in the first half
of the year have come screaming back, while the Cboe Volatility
Index, known as Wall Streets fear gauge, stands near a
In the past week, bullish sentiment reached its highest
level since March, according to a survey from the American
Association of Individual Investors. Earlier this year, that
gauge tumbled to its lowest in nearly 30 years, when stocks
swooned on worries over how the Federal Reserves monetary
tightening would hit the economy.
We have experienced a fair amount of pain, but the
perspective in how people are trading has turned violently
towards a glass half full versus a glass half empty, said Mark
Hackett, Nationwides chief of investment research.
Data over the last two weeks bolstered hopes that the Fed
can achieve a soft landing for the economy. While last weeks
strong jobs report allayed fears of recession, inflation numbers
this week showed the largest month-on-month deceleration of
consumer price increases since 1973.
The shift in market mood was reflected in data released by
BoFA Global Research on Friday: tech stocks saw their largest
inflows in around two months over the past week, while Treasury
Inflation-Protected Securities, or TIPS, which are used to hedge
against inflation, notched their fifth straight week of
If in fact a soft landing is possible, then youd want to
see the kind of data inputs that we have seen thus far," said
Art Hogan, chief market strategist at B. Riley Wealth. "Strong
jobs number and declining inflation would both be important
inputs into that theory.
Through Thursday, the S&P 500 was up 1.5% for the week, on
track for its fourth straight week of gains.
Until recently, optimism was hard to come by. Equity
positioning last month stood in the 12th percentile of its range
since January 2010, a July 29 note by Deutsche Bank analysts
said, and some market participants have attributed the big jump
in stocks to investors rapidly unwinding their bearish bets.
With stock market gyrations dropping to multi-month lows,
further support for equities could come from funds that track
volatility and turn bullish when market swings subside.
Volatility targeting funds could soak up about $100 billion
of equity exposure in the coming months if gyrations remain
muted, said Anand Omprakash, head of derivatives quantitative
strategy at Elevation Securities.
"Should their allocation increase, this would provide a
tailwind for equity prices," Omprakash said.
Investors next week will be watching retail sales and
housing data. Earnings reports are also due from a number of top
retailers, including Walmart and Home Depot, that
will give fresh insight into the health of the consumer.
Plenty of trepidation remains in markets, with many
investors still bruised from the S&P 500s 20.6% tumble in the
first six months of the year.
Fed officials have pushed back on expectations that the
central bank will end its rate hikes sooner than anticipated,
and economists have warned that inflation could return in coming
Some investors have grown alarmed at how quickly risk
appetite has rebounded. The Ark Innovation ETF, a
prominent casualty of this years bear market, has soared around
35% since mid-June, while shares of AMC Entertainment Holdings
, one of the original "meme stocks", have doubled over
You look across assets right now, and you dont see a lot
of risks priced in anymore to markets," said Matthew Miskin,
co-chief investment strategist at John Hancock Investment
Keith Lerner, co-chief investment officer at Truist Advisory
Services, believes technical resistance and ballooning stock
valuations are likely to make it difficult for the S&P 500 to
advance far beyond the 4200-4300 level. The index was recently
at 4249 on Friday afternoon.
Seasonality may also play a role. September - when the Fed
holds its next monetary policy meeting - has been the worst
month for stocks, with the S&P 500 losing an average 1.04% since
1928, Refinitiv data showed.
Wall Streeters taking vacations throughout August could also
drain volume and stir volatility, said Hogan, of B. Riley
Lighter liquidity tends to exaggerate or exacerbate moves,
(Reporting by Lewis Krauskopf; additional reporting by Saqib
Iqbal Ahmed and Noel Randewich; Editing by Ira Iosebashvili and