By Lewis Krauskopf
NEW YORK (Reuters) – Hopes for an economic soft landing are pushing U.S. stocks higher again as encouraging data ease recession concerns after a brutal sell-off earlier this month.
The index has recovered more than 6% since Aug. 5, when a steep decline pushed the U.S. benchmark index to its biggest three-day decline in more than two years. A quick return to calm was also evident in the Cboe Volatility Index, or Wall Street’s “fear gauge,” which has retreated at a record pace from last week’s four-year highs.
Driving the turnaround is this week’s reports on retail sales, inflation and producer prices, which have allayed concerns about an economic slowdown driven by weaker-than-expected employment data at the start of the month. The favorable data has strengthened the case for investors looking to return to many of the trades that have worked this year, from buying Big Tech stocks to a more recent bet on small and mid-cap names that accelerated in July.
“There was a real fear of growth,” said Mona Mahajan, senior investment strategist at Edward Jones. “Since then, we’ve seen the economic data actually look in a much more positive light.”
Some of the biggest winners of 2024 have shown strong rebounds since August 5. Chipmaker Nvidia (NASDAQ:) is up more than 20%, while Chipmaker Nvidia (NASDAQ:) is up more than 14%. Small-cap stocks, which performed strongly in July, have also recovered from recent lows, rising almost 5%.
Meanwhile, traders are abandoning expectations that the Federal Reserve will have to make massive interest rate cuts in September to avoid a recession.
As of late Thursday, futures tied to the Fed Funds rate showed traders estimating a 25% chance that the central bank will cut rates by 50 basis points in September, compared with about 85% on Aug. 5, CME FedWatch showed facts. The probability of a 25 basis point cut was 75%, in line with expectations that the Fed will start an easing cycle in September.
“You can’t necessarily completely rule out the scenario of a hard landing, but there are many reasons to believe that economic momentum is holding up well enough 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.
“We think a key highlight of Powell’s speech will be the recognition that progress on inflation has been sufficient to allow the start of rate cuts,” economists at BNP Paribas (OTC:) said in a note on Thursday.
For the year as a whole, the S&P 500 is up more than 16% and less than 2% shy of its all-time high in July.
Edward Jones’ Mahajan expects the soft landing scenario, combined with lower interest rates, will help pave the way for more stocks to join the market’s rally, rather than the small number of megacaps that are driving the indexes higher for much of it have led. year.
Analysts at Capital Economics believe that a soft landing for the US economy will support the artificial intelligence that has been driving the markets higher.
“Our forecast for the S&P 500 for the end of 2024 remains at 6,000, driven by the view that the AI narrative that dominated the first half of the year will reassert itself,” they wrote. That target would be about 8% above the S&P 500’s closing level on Thursday.
While recent economic data is reassuring, it is far from clear for markets heading into September, which has historically been one of the more volatile times of the year. Investors will be closely watching Nvidia’s earnings at the end of the month, and another employment report on September 6.
“There was a definite sigh of relief in the market,” said Quincy Krosby, chief strategist at LPL Financial (NASDAQ:). “The question now is whether the next wages report will substantiate what the market expects at this point in terms of a soft landing.”
