Hopes of 'Goldilocks' economy, rate peak buoy US stocks

investing.com:

By David Randall

NEW YORK (Reuters) — A resilient U.S. economy and expectations of a nearing peak in the Federal Reserve’s monetary policy tightening cycle are emboldening stock investors, even as worries persist over rising valuations and the potential for inflation to rebound.

The S&P 500 is up nearly 19% this year after gaining around 1% in the past week. It has risen nearly 10 percentage points since June 1, over which time the U.S. government avoided a debt ceiling default and consumer prices cooled, while growth stayed resilient.

One key factor driving stocks higher has been the view that the economy is moving towards a so-called Goldilocks scenario of ebbing consumer prices and strong growth that many believe is a healthy backdrop for stocks.

That view gained further traction in the past week, when Chair Jerome Powell said the central bank's staff no longer forecasts a U.S. recession and that inflation had a shot of returning to its 2% target without high levels of job losses.

Policymakers raised rates by another 25 basis points to their highest level since 2007 at the central bank's July 26 meeting and left the door open to another increase in September.

«The market has fully accepted the narrative that it wanted, which is Goldilocks. Until we see some set of data that scares them it's hard to see how that changes,» said Bob Kalman, senior portfolio manager at Miramar Capital.

At the same time, investors believe the Fed is unlikely to deliver much more of the monetary policy tightening that shook markets last year. Futures markets on Friday priced a nearly 73% chance that rates don’t rise above current levels through the end of the year, according to CME’s FedWatch tool, up from 24% a month ago.

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