Revival of the Wall Street Rally: Technology Stocks Lead the Way

The risk appetite on Wall Street knows no bounds, despite the unpredictable monetary measures of the Federal Reserve (Fed) and volatile economic sentiments in the bond market. With widespread speculation that Jerome Powell is on the verge of taking a critical monetary policy action, traders are now focusing on a potential interest rate decision and placing optimistic bets on a soft landing for the economy. Technology stocks, cryptocurrencies, and high-yield bonds showed remarkable upward trends this week, supported by the expectation that the Fed might be preparing a rare interest rate cut of half a percentage point. In particular, the Nasdaq 100 impressively surged by almost 6% in five days after experiencing a similar decline the previous week. This turnaround marks the latest peak in a period rich in market discussions and narratives. Stock traders believe that economic growth is sustainable, especially in anticipation of a probable reversal in monetary policy. Among market participants, there are even optimists who see an ideal investment environment: a proactive Fed that could stimulate a still-growing economy through large interest rate cuts. By the end of the week, the futures markets experienced a revival of bets on an oversized rate cut, further fueling this optimistic sentiment. The S&P 500 gained 4% in five sessions, achieving its best weekly performance since November, just a few points away from its all-time high in July. At the same time, high-yield bonds continued their rise, while the dollar lost value. Despite the optimism in the stock markets, gold prices hit an all-time high this week, and 10-year Treasury yields fell to a 15-month low, which could be interpreted as indicators of economic uncertainty. Hotter-than-expected consumer price data and a relatively healthy job market suggest a cautious monetary policy approach. The Fed faces a challenge: a 50 basis point rate cut could either trigger volatility or bolster risk appetite, depending on the underlying economic data and how central bankers communicate. Skepticism remains nonetheless: Doug Ramsey, Chief Investment Officer of the Leuthold Group, is skeptical whether the current rally will last. Similarly cautious are hedge funds, which have reduced their net equity positions to the lowest level since the end of last year. Overall, market activity shows increased caution, and weekly outflows from U.S. equity funds were the largest since April, according to EPFR Global. A particularly large rate cut precisely when the S&P 500 is near an all-time high could indicate unforeseen information from the Fed, warns James St. Aubin, Chief Investment Officer at Ocean Park Asset Management. A half-percentage point rate cut could do more harm than good, as long as there is no urgent need for action.