Investors could be fooling themselves like Charlie Brown and the perpetually elusive football, but hopes for an economic “soft landing” are reemerging. We’ve been burned by this expectation before. Maybe this time around, Lucy will show mercy.

The latest economic reports support renewed optimism that the economy can pull off the balancing act of growth amid restrictive monetary policy. Data on durable goods, consumer confidence and housing sales have all shown better-than-expected results, but at the same time, this growth hasn’t been torrid.

Can the Federal Reserve maintain tight monetary policy to fight inflation, without causing a full-blown recession? The Fed rarely gets it just right, but it’s looking increasingly possible.

At the very least, any recession is likely to be short and shallow. Hence the overall bullishness in equity markets.

The current state of the jobs market is instructive. The U.S. Department of Labor reported Thursday that Initial claims for state unemployment benefits fell 26,000 to a seasonally adjusted 239,000 for the week ended June 25. The drop was the largest since October 2021 (see chart).

Source: U.S. Department of Labor

The consensus of economists had forecast 265,000 claims for the latest week.

In a separate report Thursday, the government revised first-quarter U.S. gross domestic product (GDP) growth up to 2.0% from 1.3%.

These two economically upbeat reports could prompt the Fed to continue hiking interest rates to dampen demand. That said, this sustained level of growth isn’t strong enough to significantly stoke inflation fears.

In remarks Wednesday and Thursday, Fed Chair Jerome Powell reiterated his commitment to curbing inflation while evaluating and supporting economic stability.

The main U.S. stock market indices closed mostly higher Thursday as follows:

• DJIA: +0.80%
• S&P 500: +0.45%
• NASDAQ: -0.00%
• Russell 2000: +1.23%

Also giving stocks a boost Thursday was the passage by 23 major U.S. banks of the Fed’s “stress tests,” showing that their balance sheets are solid. Financial stocks were among the biggest gainers in the day’s session.

In recent days, consumer discretionary, communication services and energy stocks have been among the leaders whereas defensive sectors such as utilities, consumer staples and health care have lagged. This divergence signals economic optimism and an investor bias toward cyclical assets.

Rates have been trending modestly downward, with the benchmark 10-year Treasury yield currently at 3.85%, a level it’s been hovering around throughout June.

WATCH THIS VIDEO: The Fed and The Wisdom of Inaction

The Fed remains in the driver’s seat, but geopolitical uncertainty is roiling the markets. Reports surfaced Wednesday that the U.S. Commerce Department is eyeing restrictions on artificial intelligence (AI) microchip exports to China and cloud computing services to Chinese-based AI companies. The news has been weighing on the shares of chipmakers.

Perplexing investors are fast-evolving events in Russia, as Russian President Vladimir Putin contends with his disastrous war in Ukraine and the aborted mutiny of Wagner mercenaries.

In the latest chapter of this drama, several Russian generals have suddenly disappeared, prompting speculation that a Stalinist-type purge is underway. Deepening chaos in Russia could trigger a market sell-off.

Putin never undertook the difficult task of diversifying the Russian economy; the country remains a petro-state (and kleptocracy) that’s dangerously reliant on the fickle gyrations of the energy patch.

Despite the assertions of Putin apologists, Western sanctions have clearly damaged the Russian economy and they will continue to do so into the foreseeable future. Russia’s economic woes are creating headwinds for the global economy.

The markets are vulnerable to headline risk, especially the energy sector which tends to get volatile when international strife flares-up. The fact that Russia is a major partner in OPEC+ is another wild card.

I remain bullish. While a strong performance by stock markets year to date may prompt some investors to book profits, I believe that equities still have room to climb. Valuations may not be at bargain basement levels anymore, but they’re not expensive either.

However, if you’re still nervous about some of the risks I’ve just described, I suggest you consider the advice of my colleague, Jim Pearce.

Jim Pearce is chief investment strategist of our premium service Mayhem Trader. He has spent the past year perfecting a powerful indicator that’s designed to make money in a hostile market.

Jim has a proven knack for reaping profits from Wall Street mayhem. To learn more, click here for his latest video presentation.

John Persinos is the editorial director of Investing Daily.

Subscribe to the Investing Daily video channel by clicking this icon: