The Stock Market Rises on Hopes That the Fed Will Achieve a Soft Landing

Amidst speculation that the Federal Reserve will skillfully orchestrate a soft landing for the US economy, Wall Street traders propelled stocks toward yet another all-time high. This surge is attributed to the perceived resilience of the US economy and signs of abating inflation. Stronger-than-expected figures for US gross domestic product (GDP) have defied projections of a recession, boosting confidence in the prospects for Corporate America. While the robust economic performance suggests that policymakers may not be in a hurry to reduce rates in the first quarter, the alignment of a key measure of underlying inflation with the Fed's 2% target is viewed as a positive signal.

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Charles Hepworth, Investment Director at GAM Investments, expressed optimism about the current economic landscape, stating, "There are no recession concerns here, and to make matters even better, we don’t see any accompanying blowout growth in prices that are used in the GDP calculation. Stronger growth without inflation is what everyone wants."

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The S&P 500 continued its upward trajectory, edging closer to the 4,900 mark, and Treasury 10-year yields experienced a five-basis-point decline to 4.13%. The euro faced a decline following President Christine Lagarde's reserved confirmation that the European Central Bank might commence rate reductions from around mid-2024, a move interpreted by markets as a sign that earlier actions are still on the table.

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The US economy's fourth-quarter growth surpassed expectations, defying predictions of a downturn, driven by cooling inflation and heightened consumer spending, marking a surprisingly robust year. The GDP increased at an annualized rate of 3.3%. A closely monitored gauge of underlying inflation saw a 2% rise for the second consecutive quarter.

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Rob Swanke of Commonwealth Financial Network believes that this data provides ample support for Fed officials to maintain a dovish stance, even if they decide to keep rates unchanged. Callie Cox at eToro views the possibility of a recession as not out of the question but notes that it appears the Fed is successfully engineering a soft landing. According to David Russell at TradeStation, Fed Chair Jerome Powell deserves credit as the Goldilocks scenario takes hold.

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Chris Zaccarelli at Independent Advisor Alliance emphasized the strength of the economy, stating, "It is hard to argue that the economy isn’t strong." He predicts that as long as the economy avoids a recession and consumers continue spending, the stock market will continue to rally, even without the Fed cutting rates. However, Zaccarelli acknowledges that a rate cut by the Fed would provide an additional tailwind to the market, which has consistently surprised on the upside.

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As the US stock market reaches historic highs, investors are pondering the sustainability of the rally that commenced last year. Historical data from Bloomberg Intelligence reveals that whenever the S&P 500 has risen from a bear market to new peaks, subsequent returns in the following six and 12 months have consistently exceeded average levels. This pattern is seen in both forward six-month and 12-month returns, with median returns at 9.2% and 15%, respectively, after a new all-time high. Comparatively, the median returns for all half-year and yearlong periods over the past 70 years are 6.3% and 13%, indicating the potential for continued market strength.

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