The Federal Reserve is talking tough about fighting inflation—and the stock market loves it. Don’t expect equities to be so relaxed if Powell & Co. act on their words.
gained 1.8%, extending its rally for a second week, while the
rose 2%. Only the
Dow Jones Industrial Average
finished the week little changed, up 0.3%. The S&P 500 has now gained 8.1% over the past two weeks, its largest such rally since April 2020.
Don’t go looking for the “good news” that was responsible for the week’s gains—there wasn’t any, at least not of the traditional kind. Russia’s invasion of Ukraine shows few signs of ending. Fed Chairman Jerome Powell and other Fed governors have been talking up the possibility of half-point rate increases at upcoming meetings. And bonds continued to get crushed, with the 10-year yield closing the week at 2.491%, its highest since May 2019.
With government bonds on pace for their worst year since 1949, investors are looking for other places to put their money—and they may have settled on stocks. In recent weeks, stock and bond prices have stopped moving in the same direction, as they had been early in 2022. Instead, when bond prices have gained, as they did after Russia’s invasion of Ukraine, stock prices fell, observes Capital Economics market economist Thomas Mathews.
Now that investors appear to have accepted a long, drawn-out conflict—but one that won’t have as much of an economic impact as feared—bond prices are dropping and stocks are rallying. “We suspect the divergence in the two this month has been due, at least in part, to some improvement in investor sentiment with regards to the effects of the Russia-Ukraine war, resulting in improved demand for ‘risky’ assets (such as equities) at the expense of ‘safe’ ones (such as…