Stocks rise while inflation continues to cool

Stocks on Wall Street moved deeper into bull market territory in early trade on Tuesday, rising after new data showed that inflation continues to slow.

The May CPI was initially read by investors as moderate enough to warrant the Fed delaying any further rate hikes this week. The central bank will announce its decision on Wednesday.

The Standard & Poor’s 500 stock index rose 0.7 percent in afternoon trading, to its highest level since January of 2022, continuing a strong rally since the index fell to a low point in October. The S&P 500 is up more than 20 percent from its 2022 low, a gain that by many definitions breaches the threshold of a bull market, and is a sign of a new phase of exuberance in the markets.

Investors and economists view slowing inflation as limiting the Federal Reserve’s need to continue raising interest rates, which has pushed up borrowing costs for consumers and businesses and weighed on the broader stock market. Some policymakers had already suggested the Fed might not raise interest rates again this month, and after the latest inflation data, the prospect of a hike was about to expire.

Not all investors agree on the best way to define a bull market, especially when concerns remain about the long-term path of the US economy. The Standard & Poor’s 500 index is still about 9 percent below its record high, which was reached at the beginning of 2022, before fears of rising interest rates in response to the accelerating inflation that began pulled the index to about 20 percent.

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“With inflation stubbornly high, we’re seeing the business cycle eventually end in recession,” noted Alexandra Wilson Elizondo, vice president of investment for multi-asset solutions at Goldman Sachs Asset Management.

However, the abundance of investors is spreading. The Russell 2000 Index, which tracks smaller US companies most exposed to the domestic economy, rose more than 8 percent this month, jumping more than 1 percent in response to the inflation report.

The index has been tilting sideways for most of the year, and even after a rally, it’s still less than 15 percent above its 12-month low.

However, the recent rally in the Russell 2000 is still an indication that the rally has leveled off across the stock market as inflation slows and the economy remains resilient in the face of the potentially harmful effects that higher interest rates can bring.

“There is just over two weeks left until the start of the third quarter. This is important because at the beginning of the year there was an almost unanimous view that this is when the recession would begin,” said Ms. Wilson Elizondo. “Today, the recession has not arrived.”

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