The stock market soared following Fed Chair Powell’s speech. Why it might just be a ‘late-summer rally.’
5 Mins Read
Stocks surged after Federal Reserve Chair Powell left the door open to a September interest-rate cut. – MarketWatch photo illustration/Getty Images, iStockphoto
U.S. stocks surged to fresh record highs on Friday, after Federal Reserve Chair Jerome Powell suggested the labor market may be weakening enough to require help in the form of a September interest-rate cut.
The Dow Jones Industrial Average DJIA soared 846 points, or 1.9%, to 45,631.74, scoring its first record finish of the year. The S&P 500 SPX gained 1.5% to end at 6,466.91, just shy of its prior record close of 6,468.54 on Aug. 14, while the Nasdaq Composite COMP added 1.9%.
Though the tone earlier in the week was hesitant, investors on Friday were back buying technology stocks MAGS, as well as small-cap stocks RUT and other rate-sensitive parts of the market that could benefit from lower borrowing costs if the economy holds up.
Before Friday, the S&P 500 fell for five straight days through Thursday, logging its longest losing streak since Jan. 2, according to Dow Jones Market Data.
“Powell gave the market what it wanted it hear,” said Keith Lerner, co-chief investment officer at Truist Wealth. “That’s the bottom line.”
Powell also suggested tariffs could still trigger an inflation problem, but he sounded more optimistic than in the past about the possibility of there being only one-time price increases.
A chief reason for holding rates steady would be to see inflation return closer to the central bank’s 2% yearly target, especially since higher prices have begun showing up in economic data as President Trump’s tariffs take effect.
A bigger problem, however, for the Fed, markets and households would be if the cost of living becomes entrenched above 3% while layoffs also rise.
Over the last four weeks, there have been signs of rising inflation from the cost of services, said John Velis, Americas macro strategist at BNY. If goods inflation starts going higher, the Fed could end up in a position where it cuts rates as inflation is accelerating above 3%, he noted.
Traders had the odds of a rate cut of 25 basis points in September at 85.2% on Friday, above the roughly 75% chance seen Thursday. Yet there’s an August jobs report due and more inflation data still on tap before the Fed’s next rate-setting meeting in mid-September.
With that backdrop, Velis said Friday’s surge in stocks may be a “late-summer rally” based on low participation that “could get more complicated into the September and October period.”
September is typically the worst month for stock-market returns.
It’s been called one of the least-loved bull markets in memory. So why are stocks still climbing despite the uncertainty?
“What happens in a bull market is the surprises are often to the upside,” Lerner said. Given that dynamic, he sees the broadening trade into rate-sensitive parts of the equity market as having more room to continue.
Still, there’ plenty of hesitancy around stocks at fresh highs. “The market is richly priced, as it was yesterday,” said Ashley Weeks, wealth strategist at TD Wealth. “So, just because it’s rich, it does not mean it’s not going higher. But the key is long-term focus.”
For consumers, a rate cut of 25 basis points wouldn’t guarantee lower long-term interest rates for someone looking to finance a car or a home. That could be true even if the Fed cuts rates by 75 basis points this year, as TD Wealth economists expect.
“The Fed can pretty well directly impact short-term lending rates,” Weeks said. “But things like mortgages are more tied to the 10-year Treasury, which is a byproduct of the free market.
“From our perspective, it’s entirely possible the Fed could start lowering short-term rates, and yet we would see mortgage rates stay where they are, or even increase,” he added.
Inflation concerns appeared to be taking a back seat to worries about the jobs market.
The 10-year Treasury yield BX:TMUBMUSD10Y tumbled Friday, down 6.7 basis points to 4.258%. Gold prices GC00 jumped, while the ICE U.S. Dollar Index DXY fell against a basket of rival currencies and Wall Street’s “fear gauge,” the Cboe Volatility Index VIX, dropped.
Bret Barker, co-head of global rates at TCW, noted that the five-year breakeven inflation rate, which the Fed watches closely to help gauge inflation expectations, was steady Friday. Over the longer term, inflation “looks well anchored,” he said.
The U.S. economy has had a very good run in the wake of the pandemic, Barker said. Still, his team thinks investors remain too optimistic about a soft landing and the Fed having the luxury of cutting rates gradually.
“That sounds good,” Barker said. “But if unemployment rises, that’s not good for risk assets.”
