Stocks Edge Higher to End a Choppy Week

Of the 11 sectors within the S&P 500, nine rose on Friday. Stocks in energy and communication services were the only laggards.

A slowdown in inflation sent stocks ripping higher last week, and the dollar and bond yields into retreat. The S&P last week wrapped up its best stretch since the summer. But in recent days, hopes that the Federal Reserve will back off its campaign of aggressive interest-rate increases have faded somewhat.

“We had a 6% rally in the S&P 500 last week. We don’t think the Fed wants to see a return of the animal spirits,” said Derek Amey, co-chief investment officer at StrategicPoint Investment Advisors in Rhode Island. Mr. Amey said he is hiding out from the volatility by holding industrials and healthcare stocks along with bonds.Central-bank officials including St. Louis Fed President James Bullard made the case this week to keep raising rates to curb decadeshigh inflation. Mr. Bullard said Thursday that the Fed’s policy rate could rise higher than traders in interest-rate futures are expecting.

Strong labor-market and retail-sales data, meanwhile, suggested the economy has a way to go before higher borrowing costs cause the kind of downturn that could prompt the Fed to reverse course. All of that has sent jitters through the stock market —though the S&P 500 is still about 11% higher than its recent low on Oct. 12.

On the economic front, U.S. existing home sales fell for a ninth straight month in October as high mortgage rates pushed buyers out of the market.

“There is nothing that guarantees that inflation is behind us,” said Peter Boockvar, chief investment officer at Bleakley Financial Group. “Where it settles out is really what’s most important here. Do we go back to its pre-Covid trend of 1 to 2% or settle out at 3 to 4%?”

Mr. Boockvar said he’s betting that inflation will be around 3% to 4% in 2023. He plans to continue holding Treasury inflation-protected securities and stocks within the precious metals and energy sectors, which tend to do better in inflationary times.

While investors’ attention is squarely on the Fed and inflation, some money managers see a separate threat in a drop in analysts’ forecasts for earnings over the next year.

Adding to the angst, Treasury yields are inverted, with short-term U.S. government borrowing costs above longer-term yields. That dynamic has, in the past, often been predictive of a recession.

The yield on the 10-year Treasury note rose to 3.817% from 3.774% Thursday.

Many investors expect the Fed to stop raising rates early next year but to keep them elevated for some time. That could continue to challenge equities, particularly the ones with lofty valuations.

“Once the Fed begins to see cracks in the employment data and inflation, January and February we’ll head for a pause,” said Peter Cardillo, chief market economist at Spartan Capital Securities in New York.

Mr. Cardillo said he expects the S&P 500 to rally to 4150 by the end of this year, citing historical data that stocks tend to do better during the Christmas holiday. That would be about 4.5% higher than its current level.

In stocks, Ross Stores rose $9.66, or 9.9%, to $107.59. The off-price retail and home-accessories store operator raised its guidance for the fourth quarter and topped sales and earnings forecast.

Shares of Grindr surged more than $24.87, or 214%, to $36.50 after the LGBTQ-focused social network and dating app completed its merger with special-purpose acquisition company Tiga Acquisition Corp.