The Stock Market Just Had a Great Week. The Next One Could Be Messier.

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Call it the “Yes, but” stock market.

It’s easy to look at the week that stocks had and say the worst is over. The

Dow Jones Industrial Average
rose 0.8%, while the

S&P 500
gained 1.9% and the

Nasdaq Composite
climbed 4.6%. The Nasdaq even managed to string together five consecutive up days, its longest winning streak since November 2021.

Yes, but…it’s hard to understand why the market reacted so enthusiastically to the week’s news. Investors entered the week hoping, if not for a recession, then for at least some signs that the economy is slowing enough to keep the Federal Reserve from aggressively raising interest rates further. But the ISM Non-Manufacturing Index came in stronger than expected, as did durable-goods orders and the Jolts job openings report. The June payrolls data, the highlight of the economic reports, looked particularly strong: The economy added 372,000 jobs last month, nearly 100,000 more than economists had predicted—and that initially caused the stock market to sell off.

Yes, but…the jobs report, in particular, might not have been as good as it looked. While the establishment number was very strong, the household survey showed a loss of 300,000 jobs, while the unemployment rate remained unchanged at 3.6% only because the workforce shrank. At the same time, average hourly earnings increased by a mere 0.3% in June from May’s level, lower than the rate of inflation.

That’s good news on the inflation front—wages keeping up with prices is one way they get sticky, observes Deutsche Bank strategist Alan Ruskin—and could point to a soft landing for the economy if workers have enough cash in savings to prevent a collapse in spending.

“Arguably, the latest data, with softer hours worked, but robust employment and solid enough, but slower, wage growth, just about fits in this narrow soft-landing terrain,” Ruskin writes, “but whether this can be repeated month after month will need luck as much as any Central Banking skill.”

It certainly seems unlikely. In fact, the only thing that does seem certain is that the Fed will continue to raise rates. The CME FedWatch tool shows a 100% chance that the central bank will hike rates by three-quarters of a point on July 27, and a 100% chance that it will boost them by at least a half-point in September. The other near-certainty is that earnings will decelerate, something that Richard Bernstein Advisors’ Richard Bernstein notes doesn’t happen very often.

It also isn’t very good for the market. The S&P 500 has historically returned 1.7% per quarter, with a 43% chance of a loss, under those two conditions.

Yes, but…there are still reasons for optimism. Among them: Treasury inflation-protected securities are starting to price in lower inflation, with 10-year TIPS reflecting just 2.33% inflation, down from nearly 3% in April. Similarly, commodity prices have fallen, and the dollar has risen. All signal that the Fed might not be as far behind the curve as some investors think, writes Michael Darda, MKM Partners’ chief economist.

If that’s the case, the stock market might be beaten up enough. “Recession or no recession, investors will likely not be able to time a market bottom,” Darda explains. “Hence, the contrarian would be putting some funds to work here.”

Yes, but…

Write to Ben Levisohn at Ben.Levisohn@barrons.com