A Surprising Rally After a Hawkish Fed
The stock market posted its strongest session in six weeks on Thursday, one day after the Federal Reserve announced its first interest rate increase in three years. The S&P 500 and Nasdaq Composite each climbed more than 1.1%, while the Dow Jones Industrial Average added 0.61%. Leading the advance were major artificial intelligence players such as Nvidia, AMD, Taiwan Semiconductor and Micron, which recovered most of the losses suffered earlier in the week amid alarming headlines. Although the Fed indicated that another rate hike is likely before year-end, investors seemed to treat earnings momentum as the dominant force, brushing off the central bank's hawkish stance.[S1]
Positioning and Resilience Behind the Rebound
Part of the rebound can be explained by positioning: traders had priced in a greater than 90% probability of a rate hike going into Wednesday's decision, so the actual announcement contained little new information. Moreover, the Fed is tightening into a relatively resilient macroeconomic backdrop. Initial jobless claims fell to a two-month low, dropping by 10,000 to 196,000 in the week ended September 12, and continuing claims reached their lowest level in more than two years, below the FactSet consensus of 207,500. Manufacturing has not collapsed, and capital expenditure plans are accelerating. Even the ongoing Iran conflict has not derailed the broader resilience narrative.[S1]
What Could Break the Optimism
While markets appear to have moved past the rate hike, one day's trading does not establish a new regime. Knee-jerk relief rallies are often only recognizable in hindsight. If inflation turns out to be a more persistent problem than investors anticipate, the resilience story could start to crack, forcing Wall Street to choose between Nvidia's enormous backlog and a Federal Reserve committed to keeping borrowing costs higher. Other economic data released Thursday showed pending home sales unexpectedly rose 0.3% in August, contrary to a Reuters consensus for a 0.6% decline, though they remained 4.7% below year-ago levels.[S1]
