NEW YORK- Investors grew more upbeat about a year-end stock rally after a softer-than-expected inflation report on Tuesday lifted sentiment a day ahead of a Federal Reserve decision that looms as a second major test for markets this week.
December is traditionally a rosy time of the year for stocks, but the month had gotten off to a rocky start with the S&P 500 last week posting its biggest weekly drop since late September as investors pared risk from portfolios ahead of potentially market-moving events.
November’s consumer price index released on Tuesday showed a smaller-than-expected rise for a second straight month, fueling optimism that the Fed would scale back its interest rate hikes that have punished asset prices this year.
“This was a big week, and this is certainly passing the first test,” said Brent Schutte, chief investment officer at Northwestern Mutual Wealth Management Company.
“We will see what happens tomorrow, but I do think you will have a Federal Reserve that talks more balanced,” Schutte said. “It sets up for year end that has a positive tailwind towards it as we all … continue to see the writing on the wall for inflation in 2023.”
The CPI rose 0.1 percent last month, against a 0.3 percent rise expected by economists polled by Reuters. In the 12 months through November, the CPI climbed 7.1 percent, the smallest advance since December 2021.
Stocks jumped after the report with the S&P 500 last up 0.8 percent in afternoon trading. The benchmark index has rallied about 13 percent from its 2022 low reached in October, helped by back-to-back softer inflation reports, although it remains down 15 percent for the year.
The latest CPI report also prompted a further reversal of other market trends that prevailed for much of 2022, with US Treasury yields falling and the dollar weakening on Tuesday.
The S&P 500, last down about 1.5 percent so far this month, has risen an average of 1.5 percent in December since 1950, the third-best performance of any month, according to the Stock Trader’s Almanac.
Investors that had cut down equity positions and beefed up cash reserves have shown a tendency to jump aboard stock rallies in recent months, helping amplify upside moves in equities.
A UBS proprietary measure published on Friday showed that equity positioning among active fund managers was substantially below average but above the historical lows reached a few weeks ago.
“Positioning is still pretty bearish and this was certainly not one to help the bear camp out, so the risk is we squeeze (higher) into the end of the year,” said Jack Janasiewicz, portfolio manager at Natixis.
