Weekly Market Commentary: Market absorbs inflation pressures and rallies amid positive earnings news, economic data

The stock market had a great second half of the week, bolstered by better-than-expected earnings reports, relatively encouraging economic data, and improving technical factors. The Nasdaq Composite (+2.2%) led the way with a 2.2% gain, followed by the S&P 500 (+1.8%), Dow Jones Industrial Average (+1.6%), and Russell 2000 (+1.5%) with decent gains.

Ten of the 11 S&P 500 sectors finished the week in positive territory. The consumer discretionary (+3.6%), materials (+3.6%), and real estate (+3.5%) sectors each gained around 3.5%, while the communication services sector (-0.4%) was the lone holdout.

The start of the Q3 earnings-reporting season went well with most companies (predominately banks) exceeding expectations. In addition, there was a surprising 0.7% m/m increase in total retail sales for September (Briefing.com consensus -0.3%), and weekly initial claims (293,000) fell to their lowest level since the start of the pandemic.

The good news helped the market overlook persistent inflation pressures indicated in the Consumer Price Index and Producer Price Index reports for September, higher oil prices ($82.26/bbl, +2.86, +3.6%), and ongoing supply chain challenges highlighted by companies and reports.

More accurately, though, the stock market took its inflation cue from the Treasury market, which signaled a renewed tolerance for the peak-inflation narrative. This view stemmed from core CPI and core PPI coming in softer than expected on a month-over-month basis. The 10-yr yield decreased three basis points to 1.58%.

Technical factors helped, too. The S&P 500 closed above its 50-day moving average on Thursday, and the positive-minded price action carried over into Friday. This follow-through from buyers was viewed as a good indicator among traders.

Separately, the FOMC Minutes from the September meeting showed that asset purchases would be reduced on a monthly basis by $15 billion ($10 bln in Treasury securities and $5 bln in agency MBS) if begun later this year and lasting until the middle of 2022.

A weekly recap of market activity and events, featuring commentary, analysis written with individual investors in mind.

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