Fed’s Powell Sparks Market Rebound Amid Volatile Week

U.S. stocks closed higher on Friday, August 25th, 2023, rebounding from losses after Fed Chairman Powell, address at Jackson Hole.

Powell once again reiterated his commitment to bring inflation down to the 2% level.

He also said that officials “will proceed carefully” on whether to raise rates again.

The key takeaway is that Monetary policy will stay “restrictive” until inflation is moving more firmly towards the 2% target.

Earlier in the week, stocks rallied on weak PMI data, adding to anticipation of strong earnings from NVIDIA. However, they subsequently experienced a significant sell-off, even after NVIDIA reported outstanding earnings. This was a classic case of “buy the rumour, sell the fact.”

Positive jobless claims numbers were also cited as a reason for the stocks and bonds selloff, with much of the previous day’s stock and bond purchases being reversed. Investors were concerned that Powell might indicate more potential rate hikes, which further contributed to the selling pressure.

Subsequently, on Friday, following Powell’s comments, the market rallied, demonstrating a reversed pattern of “sell the rumour, buy the fact.”

For the week the DOW closed down 0.45%, the S&P was up 0.82%, and the NASDAQ increased by 2.26%.

Here are the closing levels for Friday, August 25th, 2023: 

Last  Change  %Change 
DOW JONES 34346.90 +247.48 +0.73%
S&P 500 4405.71 +29.40 +0.67%
NASDAQ 13590.65 +126.68 +0.94%
U.S. 10Y 4.235%
VIX 15.68 -1.53 -8.8%

As anticipated, last week saw considerable volatility with significant fluctuations in market prices.

It was reassuring to witness the market conclude the week on a higher note, particularly after the substantial selling observed on Thursday. Throughout the week, we managed to recover the 50-day moving average for both the S&P and Nasdaq, only to relinquish those gains the subsequent day. Some experts argue that this could be interpreted as an unfavourable sign.

Investors might be experiencing confusion, especially given the sharp selloff following NVIDIA’s exceptional earnings and the subsequent market rally despite the Fed’s restrictive stance.

While some attribute the extreme market movements to computer-driven, algorithmic trading by managed funds, it is important to note that there are other influential factors at play. These factors can significantly impact the market’s trajectory, despite the power of algorithmic trading.

From a technical perspective, it is essential to regain control of the 50-day moving average to rekindle the bull run. Currently, it seems that we are taking a breather from the recent week’s selloff.

We are hopeful for stabilization and the prevention of further downturns. Nevertheless, if we continue to receive poor data suggesting a slowdown or, worse, a recession, combined with sustained high-interest rates, the market might be compelled to persist in its downward trend.

Although the market has been rallying on negative data due to the belief that the Fed will cut rates sooner, this mindset might not hold, and a shift could be in the cards. The future direction remains uncertain—will the mentality change, or will it persist?

Source: CBOE, Bloomberg

This commentary is written by James Gomes, a seasoned finance industry veteran with extensive experience of over 30 years, including a substantial tenure at a reputable U.S. bank exceeding 20 years.

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