Stocks globally surged as U.S. inflation fears eased and China made moves to reopen its economy. The MSCI All Country World Index jumped 6.6% while the S&P 500 added 5.9%. The tech-heavy NASDAQ outperformed – gaining 8.1% as bond yields tumbled. Equity market performance overseas was also strong with European stocks climbing 7.9% and Japanese stocks rocketing 8.9% higher. Emerging market stocks recorded a 5.7% gain. The 10-year U.S. Treasury yield fell 0.35% to 3.81%.
U.S. consumer prices fell by more-than-expected in October. Headline inflation came down from 8.2% to 7.7% year-on-year while core inflation fell with used car prices coming down quickly. Importantly, inflation remains well above the Federal Reserve’s 2.0% target and additional rate hikes are still likely, but inflation appears to be finally trending in the right direction.
The key question is whether investors’ inflation fears will be replaced by recession fears. Unfortunately, falling inflation may be met by rising unemployment in the months ahead as monetary policy tightening causes the economy to cool. Although it may be too early to fully embrace risk, we believe recent market movements should serve as a reminder that market gains could come quickly once investors begin to look beyond the much-anticipated recession and towards the inevitable economic recovery.