Wall Street finished higher on Friday to close a second consecutive winning week to start off 2023. Economic data released on the day showed that consumer sentiment was positive about the worst being behind us. The numbers also support the prevailing sentiment that the Fed policies are already reining inflation in. All three major indexes ended in the green.

How Did the Benchmarks Perform?

The Dow Jones Industrial Average (DJI) rose 0.3% or 112.64 points to close at 34,302.61. Twenty-two components of the 30-stock index ended in positive territory, while eight ended in negative.

The S&P 500 gained 0.4% or 15.92 points to close at 3,999.09, its highest level since Dec 13. Eight of the 11 broad sectors of the benchmark index ended in positive territory. The Consumer Discretionaries Select Sector SPDR (XLY), the Financials Select Sector SPDR (XLF) and the Materials Select Sector SPDR (XLB) added 0.9%, 0.7% and 0.6%, respectively, while the Real Estate Select Sector SPDR (XLRE) fell 0.6%.

The tech-heavy Nasdaq increased 0.7% or 78.05 points to finish at 11,079.16, its highest level since Dec 14.

The fear-gauge CBOE Volatility Index (VIX) decreased 2.6% to 18.35. A total of 10.8 billion shares were traded on Friday, on par with the last 20-session average. Advancers outnumbered decliners on the NYSE by a 1.79-to-1 ratio. On the Nasdaq, a 1.78-to-1 ratio favored advancing issues.

Consumer Sentiment Indicates Inflation Will Ease

The University of Michigan Surveys of Consumers released on Friday showed that the one-year inflation outlook slipped to a preliminary reading of 4.0% this month from 4.4% in December, the lowest reading since April 2021. At the five-year horizon, the outlook rose to 3.0% from 2.9% last month, staying within the range of 2.9-3.1% for 17 of the last 18 months. Wall Street has been on tenterhooks in recent sessions, trying to gauge how the Fed would interpret any strength seen in economic data. The central bank has repeatedly said that it is looking for clear signs of inflation going down before it makes any strong reversals to its policy-tightening measures. On Friday, investor mood was upbeat with these numbers coming in, which reflected a strong belief from consumers that the current direction of the inflation curve would deter the Fed from further tightening monetary policy.

Per the report, consumers believe that price pressures will ease considerably over the next 12 months, with the one-year inflation outlook falling in January to the lowest level since the spring of 2021. The survey backs up the CPI numbers released on Thursday, showing consumer prices falling for the first time in more than two and a half years in December. The general consensus is that inflation is subsiding as the Fed's aggressive interest rate hikes are cooling off demand.

Simultaneously, consumers’ spirits are getting a boost. The University of Michigan's preliminary January reading on the overall index of consumer sentiment came in at 64.6, up from 59.7 in the prior month.

Stocks did well on the reports, with Consumer Discretionaries and large-cap growth stocks making the most of an encouraging outlook. Consequently, shares of Hyatt Hotels Corporation (H Quick QuoteH - Free Report) and Amazon.com, Inc. (AMZN Quick QuoteAMZN - Free Report) rose 1.3% and 3%, respectively. Both carry a Zacks Rank #3 (Hold). You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here.

Weekly Round Up

The S&P 500 and Nasdaq both posted a second consecutive positive winning week and the highest since November. The tech-heavy Nasdaq, however, stood out with a 4.82% rise. The S&P advanced 2.67%, and the Dow added 2%.

In recent weeks, market participants have been encouraged by a slew of data resonating the fact that inflation may well be on its way down. Thus, the Fed might decide to go slow in its policy tightening. There is a rising consensus that the Fed might hike the benchmark rate by 25 bps only in its February meet.