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Wall Street roars back to life with solid gains

Wall Street roared back to life over the past week with its best weekly performance of the year as investors shook off their jitters about the economic and corporate outlook.

In the week to Friday the Dow Jones Industrial Average surged 3.27 percent to 10,471.91 and the Standard and Poor's 500 broad-market index climbed 3.05 percent to 1,189.28. The tech-heavy NASDAQ composite, up for six consecutive days, chalked up a weekly gain of 3.52 percent to 2,046.42.

A key for Wall Street was a midweek report on consumer prices, which suggested that inflation was largely contained. While other economic indicators were mixed, the inflation report sparked hopes that the Federal Reserve was nearing the end of its cycle of interest rate hikes.

Dick Green at Briefing.com said the weakness in prior weeks was an overreaction but that he does not see a major rally developing.

"It has been a great week for the stock market. The economic and inflation outlooks suddenly look much better," he said.

"The recent market weakness was one of those fluctuations that investors have to learn to live through. It wasn't the start of a major down move any more than this week will prove the start of a major up move," Green said.

John Caldwell, investment strategist at McDonald Financial Group, said investors should be encouraged by the fact that the market traded up this week without a lot of economic news.

"Everybody sort of came to the realization that earnings were good; growth is going to be revised higher next week from a GDP standpoint; the inflation picture is still mixed and if it moves a little bit higher it's not as bad as they anticipated; and maybe the Fed keeps raising rates but now there's more talk that maybe they'll take a pause and that does seem to have put people in a buying mood," Caldwell said.

Linda Duessel at Federated Investments said the market can live with a slowing economy as long as inflation is in check. That was why the market responded to the report showing no change in "core" prices in April.

"The odds bet is for slower growth with no recession in the foreseeable future," she said.

"Particularly at this middle stage of the economic cycle, slower growth tends to be a good thing, helping to keep inflation under control. A red-hot economy could kindle high levels of inflation, forcing the Federal Reserve to accelerate the pace of interest rate hikes. Rapid rate hikes have often resulted in the Fed going overboard, holding down profits and leading to recession," Duessel said.

Duessel said that if the economy gets through the next Fed tightening phase without a recession, the market could kick into high gear.
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