After plummeting in the first half of the year, the S&P 500 has bounced higher like a basketball hitting a trampoline. The benchmark US stock index was up 17% from its low of June as of early Friday. It is even more optimistic elsewhere in the market. With Amazon and Tesla soaring more than 20% in price, the NYSE FANG+ stock index, which tracks 10 leading Big Tech companies, has technically entered a bull market. Yet Americans, as well as other people around the world, are highly concerned about the prospects for their economy. In advanced economies, inflation is at its highest levels in decades, and central banks appear determined to bring it under control.
So why are stock market investors so cheerful, even though there are reasons to believe an economic crunch could bring any rally to an end? At the heart of recent investors, optimism is the fact that inflation looks like it could finally be cooling as the US and global economies slow. Oil prices have fallen around 20% from their recent highs, US gasoline prices have fallen below $4 per gallon after topping $5 in June, and commodities are down sharply. Another reason to be optimistic is that the year-over-year inflation rate in the United States decreased in July. Since inflation has decreased and fears of a recession have increased, the Federal Reserve will not have to raise interest rates as high in the future and will even start reducing them by the end of the year. Or so the optimistic story goes.