Goldman gives 5 possible reasons behind the market's mysterious comeback this week

Published Fri, Mar 18 20224:08 PM EDT

Stocks have rebounded from a sell-off driven by worries around the Russia-Ukraine war, accelerating inflation, and the Federal Reserve — and they posted their best week in more than a year. However, the drivers of the market's recovery aren't totally clear, as the issues that drove the sell-off still haven't been resolved and have in some ways even gotten worse. For instance, the Fed was more aggressive this week than many investors feared, raising rates for the first time since 2018 and saying they would hike six more times this year. Further, peace talks between Russia and Ukraine have not amounted to the ceasefire many are awaiting as the war rages on. All this suggests that the S & P 500's current 6% year-to-date decline may not adequately reflect the risks that have accumulated this year. Goldman Sachs' Chris Hussey believes the market is looking ahead to brighter days and that's why it's bouncing. "If the pandemic reminded investors of anything, stock markets are very forward-looking, and can have the penchant to discount a very different environment, far before we experience it," he said in a note on Friday. He suggested five reasons the market performed so well this week despite the biggest issues in the market still being unresolved: 1. People have learned to live with Covid Recent reports of new Covid outbreaks in China and Europe haven't spooked investors the way they once did, Goldman noted. That's because markets and economies are learning how to live with the virus, particularly as vaccines and treatments roll out, Hussey suggests. 2. The Fed's aggressive plan will lower inflation Investors have been preparing for the Federal Reserve to begin hiking rates since the start of the year. Initially worries about higher rates sent the stock market reeling. However, given that inflation keeps rising, investors may be more welcoming of this week's news that the central bank sees more increases this year than initially thought. "The Fed did sound a hawkish tone but given the direction of inflation, longer-term stock investors likely welcomed the tone," Hussey wrote. "The Fed's commitment to pushing against inflation today even at the expense of growth may be interpreted as a bullish sign for risk assets 12-18 months from now." 3. Oil prices peaking U.S. oil prices this week fell way back to near $100 a barrel after rising above $130 a barrel at the start of last week. Hussey said investors may see the dramatic reversal as a reminder that there can be a counter to commodity inflation. 4. U.S. growth is strong Key economic metrics are still showing strength, the firm said. For instance, housing starts have come in better than expected, and airlines are gearing up for a surge in travel demand . At the same time, economists at Goldman Sachs have cut their growth expectations for this year — and so has the Federal Reserve — which provides a lower hurdle for 2022 and an opportunity for an upside surprise, Hussey said. 5. Geopolitical risks may fade "This catalyst is the most difficult to analyze or predict," Hussey said, but noted that the market appears to be anticipating an upside scenario. —CNBC's Michael Bloom contributed reporting

Traders work on the floor of the New York Stock Exchangeas Ukrainian President Volodymyr Zelenskyy is shown addressing Congress on March 16, 2022 in New York City. The Dow started off the day in positive territory, extending yesterday's rally.

Spencer Platt | Getty Images

Stocks have rebounded from a sell-off driven by worries around the Russia-Ukraine war, accelerating inflation, and the Federal Reserve — and they posted their best week in more than a year.