The stock-market rally survived a confusing week. Here’s what comes next.

Despite a Friday stumble, stocks ended a turbulent week with another round of solid gains, keeping 2023’s young but robust stock-market rally very much alive.

But a cloud of confusion also sets over the market, and it will eventually need to be resolved, strategists said.

Stocks rose early in the week as traders continued to bet that the Federal Reserve won’t follow through on its forecast to push the federal funds rate to a peak above 5% and hold it there, instead looking for cuts by year-end. Fed chief Jerome Powell pushed back against that expectation again on Wednesday, but a nuanced answer to a question about loosening financial conditions and an acknowledgment that the “disinflationary process” had begun convinced traders they remained right about the rate path.

On Friday, however, a blowout January jobs report, with the U.S. economy adding 517,000 jobs and the unemployment rate dropping to 3.4%, its lowest level since 1969, appeared to affirm Powell’s position.

Stocks took a hit, even if they finished off session lows, with the Nasdaq Composite
booking a fifth straight weekly gain and the S&P 500
achieving back-to-back weekly wins. The Dow Jones Industrial Average
suffered a 0.2% weekly fall.

“It kind of leaves you shaking your head right now, doesn’t it?” asked Jim Baird, chief investment officer at Plante Moran Financial Advisors, in a phone interview.

See: Jobs report tells markets what Fed chairman Powell tried to tell them

Commentary: The blowout jobs report is actually three times stronger than it appears

At some point in the coming months there will need to be “a reconciliation between what the markets think the Fed will do and what Powell says the Fed will do,” Baird said.

The rally could continue for now, Baird said, but he argued it would be wise in the long run to take the Fed at face value. “I think the overall tone of risk taking in the market right now is a little bit too optimistic.”



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