The stock market thrill ride that began a tumultuous run off the rails Monday seems to be back on track as we end the week.
At yesterday’s close, the U. S. markets had regained much of what they lost Monday and were climbing still higher.
A Series of Unfortunate Events
Monday’s stock rout was not caused by just one incident. It was the product of several events and the reaction to those events by nervous traders.
The unemployment rate hit 4.3 percent and employers added fewer jobs in July, according to a Bureau of Labor Statistics report.
On Monday Japan’s Nikkei stock index dropped 12 percent.
Many big tech companies such as Apple, Meta, Alphabet, Amazon, and Microsoft reported disappointing earnings.
That was all it took to start a rout.
Thursday Jobless Report – Another Story
Calmer heads prevailed Tuesday. Wednesday saw stocks come back but with some volatility.
By Thursday there was a new report from the Labor Department that bolstered traders’ confidence.
First-time jobless benefits claims declined for the week by 17,000 hitting a seasonally adjusted 233,000. That was lower than the Dow Jones had estimated.
That was all the market needed to take off again.
All the major stock indexes were higher on Thursday. The Dow Jones Industrial Average gained 683 points, an increase of 1.8 percent. The S&P 500 was up 2.3 percent at the end of the trading day. In addition, the Nasdaq rose 2.87 percent.
Treasury yields also rose with the 10-year note reaching 3.997 percent and the two-year note rising to 4.043 percent. In addition, the 30-year Treasury Bond climbed to 4.287 percent.
Wall Street Overreaction
Some Wall Street figures, such as JPMorgan Chase CEO Jamie Dimon see Monday’s market gymnastics as an overreaction.
“Markets fluctuate,” Dimon said in a CNBC interview. “I think people overreact a little bit to the daily fluctuation of the market. And sometimes it’s for good reasons. Sometimes it’s virtually (for) no reason.”
The R Word
Monday’s nine percent drop in the S&P 500 was significant. However, it was nothing like a crash. What is more, the subsequent rebound almost obliterates its impact.
As noted above, the U. S. stock rout was due in part to a 12 percent drop in Japan’s Nikkei 225 index. How can that trigger a sell-off in this country’s stock markets?
The answer is the carry trade.
For years hedge funds have been borrowing money in Japan at low interest rates (think zero or a little above). The trader would then invest the yens in tech stocks, U. S. government bonds, currencies, or other instruments at a higher return.
As long as there was a gap between interest rates of dollars and yens in favor of the dollar – the strategy was highly profitable.
However, the Bank of Japan began raising interest rates in March. At the same time, it is widely thought that the Fed will begin cutting rates soon. As a result, hedge funds began closing their positions. That led to a rout in the Japanese stock market which rippled through other markets including America’s.
Trump Dump
One thing that was up dramatically Monday was the Donald Trump fib-ulator. The dial on the fictitious meter gauging his political spin did a 180. The ex-president has long claimed that the strong performance of Wall Street was in anticipation of his re-election. However, Monday found him blaming President Joe Biden and Vice President Kamala Harris for Monday’s stock downturn. Surprisingly, pushback on Trump’s claim came from Fox News host Neil Cavuto.
“The Donald Trump thing in the market amazes me,” Cavuto said. “When they’re up, it’s all because of him and looking forward to him. When they’re down, it’s all because of the Democrats and how horrific they are.
“Yet some of our biggest point drops, three of the biggest of the top 10, occurred during his administration. Now, a lot of those were in the COVID years, I get that, but, you know, you either own the markets or you don’t.”
Market Impact on Potential Rate Cuts by Fed
Last week’s jobs report that contributed to Monday’s Wall Street rout has prompted many market watchers to see a Fed rate hike in September as a virtual certainty. The thinking is that the economy is gliding away from inflation, but could slide too far and enter a recession if the Fed fails to cut interest rates soon.
The Fed’s next meeting is scheduled for September 17-18. However, some have speculated the central bank could move before then. That is unlikely because the stock market is back to record levels and the economy is still adding jobs.
Mortgage Rates Drop
Mortgage rates seem to be pricing in a Fed rate cut. The 30-year fixed rate mortgage Thursday was 6.47. That is a decline from 6.73 percent last week. In addition, it marks the lowest rate since May of last year.
The 30-year refinance rate Thursday was 6.56 percent – a 32 basis point drop over last Thursday. That gives homeowners who bought when rates were higher a chance to refinance. Mortgage rates topped out at 7.79 percent last October, according to Freddie Mac.
The drop in mortgage rates is more a hint at what may come rather than an indication of immediate movement in the stalled housing market. It will likely take more rate cuts by the Fed to spur home sellers to action.
Currently, 88.5 percent of homeowners have a mortgage below six percentaccording to real estate company Redfin.
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