TLDR:
- Fed Chair Powell signals commitment to supporting economy but not rushing rate cuts
- September jobs report on Friday seen as crucial test for recent stock rally
- S&P 500 posts best year-to-date performance through September since 1997
- Dow leads major indexes with 8.2% gain in Q3, S&P up 5.4%, Nasdaq up 3%
- Expectations for another 50 basis point rate cut drop after Powell’s speech
The Federal Reserve signaled a cautious approach to future interest rate cuts as U.S. stock markets closed September and the third quarter at record highs.
Fed Chair Jerome Powell vowed to support the economy but emphasized the central bank is not rushing to make further rate reductions.
In a speech on Monday, Powell stated, “Overall, the economy is in solid shape; we intend to use our tools to keep it there.” He indicated that while the Fed may cut rates “over time toward a more neutral stance” if the economy progresses as expected, the committee is not eager to cut rates quickly.
The S&P 500 rose 0.4% to close at a new record of 5,762.48, while the Dow Jones Industrial Average and Nasdaq Composite also reached fresh highs. For the third quarter, the Dow led gains among major indexes, rising 8.2%. The S&P 500 gained 5.4%, and the Nasdaq added nearly 3%.
September, typically a challenging month for stocks, ended on a positive note.
The S&P 500 recorded its best year-to-date performance through September since 1997. This comes after the Federal Reserve’s recent 50 basis point interest rate cut, which helped lift investor confidence.
Market attention is now focused on the September jobs report, due on Friday. The report is seen as a crucial test for the recent stock rally and may provide insights into the pace of labor market cooling. Economists expect the report to show 130,000 nonfarm payroll jobs added in September, with unemployment holding steady at 4.2%.
Powell’s speech on Monday appeared to temper expectations for another large rate cut. Market bets for another 50 basis point reduction dropped to 35% following his remarks, down from 53% a day earlier.
The Fed’s stance and upcoming economic data releases have significant implications for market performance. Citi head of US equity trading strategy Stuart Kaiser suggested that evidence of the Fed cutting rates amid continued economic growth, a solid labor market, and easing inflation would be “hugely bullish” for equities.
However, if data indicates the Fed is cutting rates due to genuine concerns about labor market weakness, equities may face downward pressure. The jobs report on Friday is expected to help clarify the Fed’s motivations and economic outlook.
Other key economic indicators to be released this week include ADP’s payroll data, the monthly job openings and labor turnover survey, and reports on manufacturing and services sector activity from the Institute of Supply Chain Management.
As the market navigates these economic signals, investors are weighing the potential for a “soft landing” scenario, where the Fed manages to control inflation without triggering a recession. Strong economic data could boost confidence in this outcome, while weaker-than-expected figures might reignite recession fears.
The tech sector has lagged behind other areas of the market in recent performance. A potential cyclical rotation, where economically sensitive sectors outperform, may depend on labor market data exceeding current expectations.