By Louis Krauskopf
NEW YORK (Reuters) – Hopes of a soft economic landing are once again helping U.S. stocks rise after a sharp sell-off earlier this month as upbeat data eased recession fears.
The S&P 500 has recovered more than 6% since Aug. 5, when a selloff caused the major U.S. stock index to post its first three-day decline in more than two years. The rapid return of calm is also evident in the Chicago Board Options Exchange Volatility Index, also known as Wall Street’s “fear gauge,” which has fallen at a record pace from last week’s four-year high.
The stock recovery was driven by the release this week of retail sales, inflation and producer price index reports, which helped ease concerns about an economic slowdown following a weaker-than-expected jobs report released earlier in the month. The upbeat data is giving investors more support as they look to revisit many of the trades that have worked for them this year, from buying big tech stocks to more recent bets on small and mid-cap stocks that accelerated in July.
“There was a real sense of fear about economic growth,” said Mona Mahajan, senior investment strategist at Edward Jones. “Since then, the economic data has actually been much more positive.”
Some of 2024’s biggest winners have staged strong rebounds since Aug. 5. Chipmaker Nvidia has risen more than 20%, and the Philadelphia SE Semiconductor Index has risen more than 14%. Small-cap stocks, which performed well in July, have also recovered from recent lows, with the Russell 2000 up nearly 5%.
Meanwhile, traders are moving away from the view that the Federal Reserve will need to make a big interest rate cut in September to avert a recession.
As of late Thursday, futures markets tracking the federal funds rate were pricing in a 25% chance that the Fed would cut rates by 50 basis points in September, down from about 85% on Aug. 5, according to data from CME FedWatch. A 25-basis-point cut was 75% likely, consistent with the view that the Fed would begin an easing cycle in September.
“While we can’t necessarily rule out a hard landing scenario, there’s plenty of reason to believe that economic momentum is holding up well at this point,” said Jim Baird, chief investment officer at Plante Moran Financial Advisors.
The Fed’s plans could become clearer next week when Chairman Jerome Powell speaks at the central bank’s annual economic policy symposium in Jackson Hole, Wyoming.
“A key takeaway from Chairman Powell’s speech will likely be an acknowledgement that inflation developments are sufficient to allow him to begin cutting rates,” economists at BNP Paribas said in a note on Thursday.
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The S&P 500 is up more than 16% this year and is within about 2% of its all-time high hit in July.
Edward Jones’ Mahajan expects the soft landing scenario, combined with low interest rates, will pave the way for more stocks to join the market rally rather than the few large-cap stocks that have driven stock indexes higher for most of the year.
Analysts at Capital Economics believe a soft landing for the U.S. economy will bolster the artificial intelligence craze that has powered the market rally.
“We maintain our forecast for the S&P 500 at 6,000 by the end of 2024, as we expect the AI narrative that dominated earlier this year to regain momentum,” they wrote. That target would represent an increase of about 8% from the S&P 500’s closing price on Thursday.
While recent economic data has been reassuring, it doesn’t bode well for markets heading into September, historically one of the most volatile periods of the year. Investors will be keeping a close eye on Nvidia’s earnings at the end of the month and the jobs report on Sept. 6.
“There’s clearly been a sigh of relief in the market,” said Quincy Krosby, chief global strategist at LPL Financial Inc. “The question is, will the upcoming jobs report confirm the market’s expectations at this point of a soft landing?”
(Reporting by Louis Krauskopf; Editing by Illa Iosebashvili and Richard Chang)