The bull market that started in late 2022 seemed to be coming to a stop for a short period. In the past few weeks, all major indexes experienced declines. The Nasdaq Composite Index is a stock market index that includes the performance of a wide range of stocks listed on the Nasdaq stock exchange. It has even entered into correction territory officially.
Nevertheless, these indicators have shown a notable recovery in recent days. Could the downward trend in the stock market have come to an end? It is possible. Here are three explanations why.
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The situation with employment is not as dire as it was first believed.
The employment data for July was disappointing and served as a clear warning for investors at the beginning of the month. There was a significant decrease in hiring, leading to a rise in the unemployment rate for the fourth month in a row.
Certain investors were particularly worried about the activation of the “Sahm Rule”. This rule, coined in honor of ex-Federal Reserve economist Claudia Sahm, indicates that a recession The recession is probably already in progress if the average unemployment rate for three months rises by 0.5% above its lowest point in the last year.
Nevertheless, Sahm does not believe that her rule is relevant at the current moment. She is of the opinion that various factors such as Americans leaving the workforce and increased immigration have made her recession indicator less trustworthy.
Additionally, there was a decrease of 17,000 in the number of initial unemployment claims during the first week of August compared to the previous week, bringing the total to 233,000. This figure was significantly lower than what was predicted. Certain economists are now speculating that the rise in unemployment rates could have been influenced by Hurricane Beryl and temporary closures at car manufacturing plants, leading to a less negative employment situation than originally anticipated.
The carry trade is almost finished.
One more reason contributing to the recent decline in the stock market was the The Bank of Japan has raised its interest rates. A number of investors had been borrowing Japanese yen at extremely low interest rates to invest in U.S. stocks. The increase in Japanese interest rates caused a disturbance in this strategy. “carry trade,” Investors are selling stocks in order to repay their loans.
Japan currently has a low interest rate of 0.25%, which represents a significant increase from the previous rate of 0.1%. This change, which is 2.5 times higher, has had worldwide repercussions due to the large amount of money, estimated at $4 trillion, involved in the carry trade.
Fortunately, JPMorgan It is believed that around 75% of the Japanese yen carry trade has been reversed. If this is true, then the worst may be behind us.
It appears probable that the Federal Reserve will reduce interest rates in the near future.
Investors have more good news as it appears probable that the Federal Reserve will cut interest rates soon. The worries surrounding the employment figures for July may lead to a higher chance of a more significant rate reduction.
In a recent statement, Federal Reserve Chairman Jerome Powell mentioned the possibility of lowering the policy rate in September. The Fed closely monitors inflation and employment levels, and if inflation continues to decline, a rate cut is likely to occur next month.
There is a possibility of not just one interest rate cut this year. Powell mentioned that he can imagine a situation where there could be multiple rate reductions by the conclusion of 2024.
Businesses benefit from rate cuts as they decrease the expenses associated with borrowing money. The stock market does not consistently increase after a decrease in interest rates. Yes, it frequently happens.
What is meant by a “dead cat bounce”?
There is still a chance that the recent recovery in the stock market might just be a temporary bounce. A “dead cat bounce” refers to a temporary recovery or increase in the value of a stock or other asset that has been declining significantly. These temporary rebounds do not endure and can mislead investors with a sense of optimism that is not justified.
In times of uncertainty, investors are advised to maintain a long-term perspective. It is recommended to invest in index exchange-traded funds (ETFs) and shares of companies with strong fundamentals that are expected to thrive in the coming years and beyond. Regardless of the current stock market fluctuations, it is important to remember that market downturns are temporary and will eventually recover.
