Soft landing hopes for the US economy give Wall Street investors a sense of respite

Bullish sentiment in the last week reached its highest level since March

Investors next week will be watching retail sales and housing data. Earnings reports are due from retailers, including Walmart and Home Depot. AFP

Optimism is slowly returning to the US stock market, as some investors grow more convinced that the economy may avoid a severe downturn even as it copes with high inflation.

The benchmark S&P 500 has rebounded about 15 per cent since mid-June, halving its year-to-date loss, and the tech-heavy Nasdaq Composite is up 20 per cent in that time.

Many of the so-called meme stocks that had been pummelled in the first half of the year have rallied, while the CBOE Volatility Index, known as Wall Street’s fear gauge, stands near a four-month low.

In the past week, bullish sentiment reached its highest level since March, according to a survey from the American Association of Individual Investors.

Earlier this year, that gauge tumbled to its lowest in nearly 30 years, when stocks swooned on worries over how the Federal Reserve’s monetary tightening would hit the economy.

“We have experienced a fair amount of pain, but the perspective in how people are trading has turned violently towards a glass half full versus a glass half empty,” said Mark Hackett, chief of investment research at Nationwide.

Data over the last two weeks bolstered hopes that the Fed can achieve a soft landing for the economy. While last week’s strong jobs report allayed fears of recession, inflation numbers this week showed the largest month-on-month deceleration of consumer price increases since 1973.

The shift in market mood was reflected in data released by BoFA Global Research on Friday: tech stocks had their largest inflows in about two months over the past week, while Treasury Inflation-Protected Securities, which are used to hedge against inflation, notched their fifth straight week of outflows.

“If, in fact, a soft landing is possible, then you’d want to see the kind of data inputs that we have seen thus far,” said Art Hogan, chief market strategist at B Riley Wealth. “Strong jobs numbers and declining inflation would both be important inputs into that theory.”

Until recently, optimism was hard to come by. Equity positioning last month stood in the 12th percentile of its range since January 2010, a July 29 note by Deutsche Bank analysts said, and some market participants have attributed the big jump in stocks to investors rapidly unwinding their bearish bets.

With stock market gyrations dropping to multi-month lows, further support for equities could come from funds that track volatility and turn bullish when market swings subside.

Volatility targeting funds could soak up about $100 billion of equity exposure in the coming months if gyrations remain small, said Anand Omprakash, head of derivatives quantitative strategy at Elevation Securities.

“Should their allocation increase, this would provide a tailwind for equity prices,” Mr Omprakash said.

Investors next week will be watching retail sales and housing data. Earnings reports are also due from a number of top retailers, including Walmart and Home Depot, that will renew insight into the health of the consumer.

Plenty of trepidation remains in markets, with many investors still bruised from the S&P 500’s 20.6 per cent tumble in the first six months of the year.

Fed officials have pushed back on expectations that the central bank will end its rate rises sooner than anticipated, and economists said that inflation could return in coming months.

Some investors have grown alarmed at how quickly risk appetite has rebounded. The Ark Innovation ETF, a prominent casualty of this year’s bear market, has soared around 35 per cent since mid-June, while shares of AMC Entertainment Holdings, one of the original “meme stocks”, have doubled over that time.

“You look across assets right now, and you don’t see a lot of risks priced in any more to markets,” said Matthew Miskin, co-chief investment strategist at John Hancock Investment Management.

Keith Lerner, co-chief investment officer at Truist Advisory Services, believes technical resistance and ballooning stock valuations are likely to make it difficult for the S&P 500 to advance far beyond the 4,200 to 4,300 level. The index was at 4,249 on Friday afternoon.

Seasonality may also play a role. September — when the Fed holds its next monetary policy meeting — has been the worst month for stocks, with the S&P 500 losing an average 1.04 per cent since 1928, Refinitiv data showed.

Wall Streeters taking holidays throughout August could also drain volume and stir volatility, said Mr Hogan.

“Lighter liquidity tends to exaggerate or exacerbate moves,” he said.