Fed put helps power stock market rally

Equity Markets: A Volatile August and a Resilient Rebound

In early August, equity markets faced significant turbulence, driven in part by the unwinding of the Yen carry trade, which sent shockwaves across global markets. The Nasdaq experienced its first notable correction, while Japan’s Nikkei entered bear territory, having dropped over 20%.

Strong Data Lifts Equity Prices

Following remarks from the Governor of the Bank of Japan that tempered expectations of further rate hikes, markets swiftly rebounded, putting an end to the initial wave of volatility. This recovery was bolstered by a stream of positive economic data, including improvements in business confidence and robust retail sales, easing concerns about a looming recession.

Throughout 2023 and 2024, recession fears dominated market sentiment, with many investors retreating into fixed-income assets. However, encouraging macroeconomic trends have forced many of these bears into retreat, while bulls are now seeking opportunities beyond the well-known “Magnificent 7.” This broadening rally has seen multiple sectors within the S&P 500 reach record highs, underscoring a more diversified market recovery.

FOMC Fuels Risk-On Sentiment

The debate over whether the Federal Reserve would hike rates by 25 or 50 basis points cast uncertainty over the recovery, as concerns about elevated valuations prompted selling pressure. A larger-than-expected hike was initially perceived as a bearish signal, suggesting underlying economic weakness.

However, when the FOMC’s decision finally came, the anticipated 50 basis point hike did not rattle markets. In fact, Chairman Powell’s explanation at the post-FOMC press conference provided clarity, emphasizing that the decision was grounded in improving inflation dynamics and a moderating labor market. This signaled that inflation risks and labor market imbalances were moving toward a more stable equilibrium, reassuring investors.

Looking Ahead

As we enter the final week of the quarter, market participants will be closely monitoring upcoming economic data and speeches from Fed officials. Particular attention will be paid to any dovish signals from the FOMC, as these could provide clues about the rate path in November 2024.

Investors should also remain mindful of potential profit-taking and heightened volatility as we head into October, a month that is historically prone to seasonal weakness. We will continue to keep you updated on market developments as they unfold.