U.S. stocks are rallying again, driven by renewed hopes for an economic soft landing, as encouraging economic data ease recession concerns following a sharp market decline earlier this month. Since August 5, when the S&P 500 experienced its most significant three-day drop in over two years, the index has rebounded more than 6%. The rebound has been mirrored by a swift decline in the Cboe Volatility Index (.VIX), often referred to as Wall Street's "fear gauge," which has fallen sharply from its recent four-year highs.
This turnaround is largely attributed to recent reports on retail sales, inflation, and producer prices, which have mitigated fears of an economic slowdown initially triggered by disappointing employment data at the beginning of the month. The positive data has encouraged investors to reengage in successful trades from earlier in the year, such as investing in Big Tech stocks and betting on smaller and mid-cap companies, which saw a resurgence in July.
Several top performers of 2024 have seen significant recoveries since August 5. For instance, chipmaker Nvidia (NVDA.O) has surged over 20%, and the Philadelphia SE Semiconductor index (.SOX) has gained more than 14%. Small-cap stocks, which had been strong in July, have also bounced back from recent lows, with the Russell 2000 (.RUT) climbing nearly 5%.
At the same time, traders are reassessing expectations that the Federal Reserve will implement large rate cuts in September to prevent a recession. By late Thursday, futures linked to the Fed funds rate indicated a 25% chance of a 50 basis point rate cut in September, a significant drop from approximately 85% on August 5. The likelihood of a 25 basis point cut was at 75%, reflecting the anticipation of the Fed beginning an easing cycle in September.
Clarity on the Fed's plans might emerge next week when Chair Jerome Powell addresses the central bank's annual economic policy symposium in Jackson Hole, Wyoming.
Year-to-date, the S&P 500 has risen more than 16% and is within about 2% of its all-time closing high reached in July.
Despite the reassuring economic data, September remains a historically volatile month, and investors will be closely monitoring Nvidia’s earnings later this month and a forthcoming employment report on September 6.
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