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The stock market had another good week, with the S&P 500 finishing in the green for the fourth consecutive week. The Dow Jones Industrial had a couple of days with gains of over 400 points. On Wednesday, the Dow gained 535.10 points or 1.63 percent. On Friday, the Dow closed higher by 424.38 or 1.27 percent.

Also, on Wednesday, the Nasdaq jumped 2.89 percent, and the S&P 500 rose 2.13 percent to its highest level since May. On Friday, the indexes had similar gains. For the week, the DJIA rose 2.9 percent, the S&P 500 gained 3.3 percent, and the Nasdaq closed higher by 3.1 percent.

Wednesday’s big rally began at the opening bell after the July Consumer Price Index (CPI) came out, showing inflation was lower than anticipated. The July CPI rose 8.5 percent compared to July a year ago. While still not a great number, it was lower than the 9.1 percent number last month and lower than the estimated increase of 8.7 percent.

A drop in gasoline prices is the main reason for the decrease. On a monthly basis, the CPI report showed gasoline fell by 7.7 percent, and energy prices dropping by 4.6 percent. These declines were offset by monthly gains of 1.1 percent in food prices and a 0.5 percent increase in shelter costs.

Taking out the more volatile food and energy prices, the core CPI rose 5.9 percent from prices in July 2021 and an increase of 0.3 percent over last month. Estimates had these figures at 6.1 percent annually and 0.5 percent monthly.

The market rallied on the CPI report as traders believed this could slow the aggressive moves by the Federal Reserve. At the least, it shows that inflation could have already peaked.

Even with the lower-than-expected numbers, inflation is still the main concern on Wall Street. The 12-month increase in food prices of 10.9 percent is the fastest pace since May 1979. Food items showing the largest year-over-year gains are butter up 26.4 percent, coffee up 20 percent, and eggs jumping 38 percent.

Even though the energy index dropped, electricity is up 1.6 percent and an increase of 15.2 percent over last July. The overall energy index is up 32.9 percent from a year ago.

Items that showed a monthly decline were used vehicles down 0.4 percent, apparel down 0.1 percent, transportation down 0.5 percent, and airline fares were down 1.8 percent for the month.

Shelter costs are up 5.7 percent from a year ago and continue to rise. Shelter costs make up about one-third of the Consumer Price Index weighting.

The drop in inflation was good news for workers as their monthly real wages increased 0.5 percent, but when adjusted for inflation are down 3 percent from a year ago. The main reasons for inflation continue to be problems with the supply chain, high demand for goods that are in short supply, and trillions of dollars in monetary stimulus.

Before this recent CPI report, it was expected that the Fed would raise rates 75 basis points for a third consecutive time. But following the report, traders now believe there is a better chance of a smaller 50 basis point rate hike.

Another sign that inflation has already peaked is wholesale prices fell 0.5 percent in July from the previous month for the first time since April 2020. The producer price index gauges the prices received for final demand products. Economists expected an increase of 0.2 percent.

On an annual basis, the PPI rose 9.8 percent, the lowest rate since October 2021. That compares with a record increase of 11.7 percent in March and an increase of 11.3 percent in June.

The second-quarter earnings season is almost complete. Out of the 455 companies listed on the S&P 500 already reporting, about 63 percent have beat revenue forecasts, and 75 percent have topped profit projections. Compared to last year, earnings are forecast to be 8.7 percent higher, with revenue growth projected to be up 14.8 percent.

The upcoming week will have the following economic reports that will tell us how the housing market is doing, which could affect the major market indexes:
• Tuesday: Housing starts
• Wednesday: Federal Reserve minutes from the July 26-27 meeting
• Wednesday: Retail sales
• Thursday: Existing home sales from the National Association of Realtors

Last week ended with the Dow Jones Industrial dropping just 0.1 percent, the S&P 500 gaining 0.4 percent, and the Nasdaq closing up 2.2 percent. And a third straight week the S&P 500 finished with a gain.

The three major market indexes remained in the red for the year, with the DOW down 9.7 percent, the S&P 500 down 13 percent, and the Nasdaq off by 19.1 percent.

The big news of the week was the much better-than-expected July jobs report. The jobs report quieted any talk that the country was in a recession and that the economic recovery is fading. Non-farm payrolls increased 528,000 for the month, beating the Dow Jones estimate of an increase of 258,000.

The unemployment rate dropped to 3.5 percent and is back to pre-pandemic levels. The 3.5 percent unemployment rate is the lowest unemployment rate since 1969. Wages also grew more than expected, with the average hourly earnings rising 0.5 percent for the month and up 5.2 percent from this time a year ago.

Higher wages and a blowout jobs report fueled the belief that this will force the Federal Reserve to continue aggressive rate hikes to continue their fight against high inflation.

Also falling below its pre-pandemic levels, the long-term unemployment number also fell by 269,000 in July. According to the U.S. Department of Labor, the number of long-term unemployed dropped to 1.07 million people, compared to 1.1 million before the pandemic began in February 2020.

In July, 18.9 percent of all unemployed Americans that are considered long-term unemployed, down from 39 percent in July 2021. The definition of long-term unemployed is being jobless for at least six months. Those without a job for this long find it harder to get another job due to employment gaps in their resume.

Other economic news includes the Institute for Supply Management (ISM) survey that showed bottlenecks in the supply line were easing. Prices paid by businesses dropped by the most since 2017, due to dropping commodity prices. Labor shortages, especially truck drivers, continued to hamper supply lines.

The market is still skittish about the future plans of the Federal Reserve, even though most think that they will still be aggressive with a 75-basis point increase at their next meeting.

Even though Federal Reserve Chairman Jerome Powell used the phrase “softish landing” a couple of months ago, it is still reverberating in the markets. Other economists believe that the bottom of the market has already occurred in June and that rate hikes will stop or at least pause in early 2023.

Earnings last week continued to improve. Second-quarter earnings of companies on the S&P 500 are expected to increase by 6.7 percent. That is up from the 5.8 percent increase that was projected two weeks ago. As of Friday, 87 percent of the companies have reported results.

The strong jobs report on Friday sent bond prices down and yields higher. The yield of the U.S. Treasury bond jumped to 2.84 percent, which was up from 2.64 percent at the previous week’s close.

Another sign that inflation could be easing was West Texas Intermediate crude oil falling below $90 per barrel for the first time since the Russia-Ukraine war began last February. Oil was trading at $88.37 on Friday afternoon for an overall decline of 10.4 percent for the week.

On Sunday afternoon, the Senate passed the sweeping climate, health, and tax package, also known as the Inflation Reduction Act. The vote was strictly along party lines, with Vice President Kamala Harris casting the deciding vote. It will now go to Congress, where it is expected to pass, and then onto President Biden.

On Wednesday of this week, the Consumer Price Index for July will be released by the Bureau of Labor Statistics. The report will give the market a good idea of inflation and if the rate hikes are working. For June, the figure was running at 9.1 percent on an annual basis.