Stocks are currently in a unique position where they seem to be benefiting from both falling inflation and a still-strong economy. This has provided investors with a sense of relief after initial concerns were raised earlier this month when jobs data came in weaker than expected, sparking fears of a looming recession. However, recent economic data has painted a more optimistic picture, suggesting that a soft landing may be on the horizon.
The stock market’s best-case scenario received a boost this week, surprising many investors who had previously panicked over the job market’s performance in July. Unemployment rates had risen to their highest level since the pandemic, causing some to fear the worst. Yet, a significant rally on Wall Street was fueled by the latest economic data, which indicated a cooling inflation trend and a stable, growing economy.
According to Tim Hayes, the chief global investment strategist at Ned Davis Research, sentiment extremes have led to excessive recession worries that are now being replaced by expectations of a more friendly Fed. The realization that recession fears may have been overblown has shifted focus towards a potential series of rate cuts by the Federal Reserve in the near future.
Strategists on Wall Street are finding comfort in four key data points that suggest the economy is heading towards a soft landing. Firstly, inflation is definitively on the decline, with consumer prices rising 2.9% on a yearly basis in July, lower than expected and below the previous month’s increase. This trajectory of decelerating inflation is seen as a green light for the Fed to cut interest rates, potentially sparking a rally in stocks.
Secondly, jobless claims have hit a five-week low, with new applications for unemployment benefits falling below expectations. The spike in unemployment claims earlier in the month is believed to be influenced by external factors like severe weather events, rather than a slowing economy. This, coupled with strong retail sales data, indicates that recession risks remain low.
Consumer spending posted a surprise jump in July, with retail sales seeing the biggest increase in over a year. This aligns with a soft-landing economic outlook, with analysts predicting rate cuts from the Fed in the coming months. Small businesses are also feeling more confident, with optimism reaching its highest level in years. This suggests that the recent spike in recession fears may have been unwarranted.
Despite the renewed hope for a soft-landing scenario, some forecasters caution that there is still a decent chance of recession depending on how the job market and economic activity evolve. New York Fed economists see a 56% chance of the economy entering a downturn by next year. Overall, the current economic data points towards a positive outlook for stocks, with falling inflation and a still-strong economy providing a favorable environment for investors.
