Barely a week after experiencing a significant global sell-off, US stocks have made a remarkable recovery. The turbulence was initially triggered by the Bank of Japan’s decision to raise interest rates for the second time this year in late July. This action led to the unwinding of the yen carry trade, a strategy where investors borrow yen at low interest rates to invest in higher-yielding assets elsewhere. The unraveling reached its peak last week when Japanese stocks faced their worst day in decades. In the US, a disappointing July jobs report stoked fears of an impending recession, causing a sharp decline in both stocks and bond yields.
However, a series of positive economic data released this week has helped the market regain some of its lost ground. The Dow Jones Industrial Average has risen above 40,000 once again. All three major US stock indexes recorded their best week of the year, with the Dow gaining 2.9%, the Nasdaq Composite surging by 5.3%, and the S&P 500 rising by 3.9%. Both the Nasdaq and the S&P 500 have not only recovered last week’s steep losses but are also showing gains for the month.
The Cboe Volatility Index (VIX), often referred to as Wall Street’s fear gauge, dropped to 15, a sharp decline from over 65 just a week ago. The index had experienced its most significant single-day point increase since March 2020 last Monday. Ed Clissold and Thanh Nguyen from Ned Davis Research noted in a Thursday report, “The bull market has not been derailed. While more aftershocks are possible, traders seem to be moving past the initial earthquake of the yen carry trade unwind.”
Despite the recent calm, investors remain cautious and are closely monitoring economic data as they anticipate the Federal Reserve’s next meeting in September. Geoffrey Strotman, senior vice president at Segal Marco Advisors, pointed out that the Fed will closely analyze the July Personal Consumption Expenditures price index, as well as labor and inflation data from August, before making its policy decision on September 18.
While many traders are anticipating an interest rate cut in September, some Federal Reserve officials have recently expressed a more cautious stance. Raphael Bostic, the President of the Atlanta Fed, remarked on Tuesday that while inflation has cooled in recent months, he wants to see more sustained progress in bringing prices down. “We need to make sure that the trend is real,” Bostic stated at a conference organized by the American College of Financial Services. “So, I’m willing to wait, but [a cut is] coming.”
Recent data does indicate that inflation is indeed cooling. According to the Bureau of Labor Statistics, consumer prices rose by 2.9% over the 12 months ending in July, dipping below 3% for the first time since March 2021. Additionally, the rate of wholesale price increases has also slowed.
Further good news came from the latest retail sales report, which showed that sales at US retailers increased by 1% in July compared to the previous month. This was a significant improvement from June’s downwardly revised decline and far exceeded economists’ expectations. This strong performance by the US consumer, a crucial pillar of the economy, suggests that consumer spending remains resilient.
This string of encouraging economic reports has strengthened the case for a rate cut in September, though it remains uncertain whether the Fed will opt for a quarter-point or a half-point reduction. According to the CME FedWatch Tool, traders have lowered their expectations for a half-point cut from 51% a week ago to 26%.
The Russell 2000 index, which tracks the performance of US small-cap stocks, climbed by 3% this week, reflecting traders’ bets that the Fed will reduce rates in September. Small-cap stocks often perform well following the Fed’s initial rate cut in an easing cycle.
Before the Fed’s September meeting, however, all eyes will be on Fed Chair Jerome Powell’s upcoming speech at the annual economic summit in Jackson Hole, Wyoming, next week. Powell has historically used this event to signal the Fed’s future policy direction. His remarks have sometimes led to significant market volatility. For instance, after last year’s speech, stocks fluctuated before ultimately closing slightly higher. In contrast, in 2022, stocks plummeted, with the Dow dropping more than 1,000 points after Powell warned of further economic pain due to higher interest rates.
In other market developments, US crude oil prices declined this week following the Organization of the Petroleum Exporting Countries’ (OPEC) decision to cut its global oil demand growth forecast for both 2024 and 2025. OPEC now anticipates demand will increase by 2.11 million barrels per day in 2024, down from the 2.25 million barrels per day it had projected last month, citing weakening economic expectations in China.
In corporate news, Starbucks shares surged by 26.3% this week after the company announced that CEO Laxman Narasimhan would be stepping down immediately. He is set to be succeeded next month by Brian Niccol, currently the CEO of Chipotle. Niccol is credited with revitalizing Chipotle following its 2018 E. coli outbreak crisis, which resulted in the hospitalization of 22 people.
Walmart also experienced a significant boost, with its shares rising by 8.1% this week. The retail giant reported that sales at US stores open for at least one year had jumped last quarter, and its operating income saw substantial growth.
As the US stock market continues its recovery, investors remain focused on the upcoming Federal Reserve meeting and other key economic indicators. While the market has shown resilience, uncertainty lingers, and traders are closely watching for any signals that could influence future market movements.
