For the past couple of years, investors have had to deal with a macroeconomic factor they'd previously been able to ignore for decades: inflation.
A host of global issues combined to propel it skyward, and people could clearly feel the impact when they went to grocery stores, car dealers, and practically everywhere else. The broader economic outlook was thrown for a loop, and officials at the Federal Reserve responded with their most aggressive monetary tightening campaign in over a generation. Growth stocks tumbled -- a decline that played a key role in 2022's bear market.
However, the news out of Washington Tuesday appears to have led investors to conclude that inflation is essentially no longer a serious threat. With major market benchmarks climbing 2% or more Tuesday morning, Wall Street appears ready for what could become a massive end-of-year stock market rally. Here's how a single report on the Consumer Price Index (CPI) led so many investors to decide that inflation is down for the count.
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The CPI news Wall Street wanted to hear
The headline numbers from October's CPI report were impressively benign. After seasonal adjustment, the primary CPI reading came in unchanged for the month, flattening out after a somewhat steep 0.4% month-over-month rise in September. On a year-over-year basis, the CPI is now 3.2% higher than it was 12 months ago. That was the lowest growth level in several years. At its worst levels of 2022, CPI growth briefly climbed above 9%.
As often happens, energy provided the biggest calming influence on the CPI for the month. Gasoline prices fell 5% in October, offsetting increases in other areas and pulling the overall energy index down 2.5% for the month. Food prices were up by a modest 0.3%.
Many economists prefer to concentrate largely on the so-called "core" CPI figure, which excludes volatile food and energy prices. Core CPI rose by 0.2% in October, with a variety of countervailing factors affecting prices. Consumers paid more for rent, car insurance, medical care, recreation, and personal care products. However, costs for lodging, used cars and trucks, communication services, and airfares fell, somewhat offsetting price hikes elsewhere. That brought the core CPI's year-over-year increase down to 4%, its smallest increase since September 2021.
The impact on the market
Financial markets celebrated the inflation news. Bond yields plunged, with the yield on the 10-year Treasury falling below 4.5% and rates on intermediate-term Treasury bonds dropping by as much as a fifth of a percentage point -- huge moves in the usually boring bond market. Stocks whose fortunes are tied most closely to interest rates also soared, with the Real Estate Select Sector SPDR (XLRE +1.29%) exchange-traded fund climbing by between 5% and 6% as of midday Tuesday.
More broadly, high-growth stocks that were previously hammered by rising interest rates posted solid gains. The Nasdaq Composite index picked up more than 2%, and equal-weight versions of the Nasdaq index outperformed the market capitalization-weighted version of the benchmark. Stocks with the closest ties to real estate and housing were among the morning's top winners, with Zillow Group (Z +2.27%) (ZG +2.17%) seeing a notable rebound of more than 11%.
NASDAQ: Z
Key Data Points
Is the bear market over?
Stock market bulls have been hoping for more signs that the Federal Reserve would end its interest rate hiking campaign. They're generally taking the October inflation report as evidence that the Fed can now turn its attention back to supporting the economy.
Yet it's still not out of the question that the Fed could deal the markets a surprise. Yields on short-term Treasury bills remain between 5.25% and 5.5%, and few expect the central bank will rapidly cut benchmark interest rates. If the current higher rates are held steady and lead to more economic strain, then this market rally could prove short-lived.
Nevertheless, for now, most investors appear to have a more positive outlook on the market's near-term prospects. If consumers are able to back up that belief with ongoing spending even as their budgets get tighter, then they could finally deliver the definitive bull market that many on Wall Street have expected for a long time.
