The U.S. market has experienced an unprecedented event in the past 17 years: ETFs tracking government bonds, corporate credit, and stocks have simultaneously risen for four consecutive months, the longest streak since 2007.
According to seventy years of historical data compiled by Ned Davis Research, the S&P 500 index has risen by 25% over the past 12 months. Historically, such a strong performance had never occurred ahead of the first rate cut in a Federal Reserve easing cycle.
Despite lingering doubts about the economy, inflation, and central bank responses, traders do not appear unnerved. Before the Federal Reserve formally takes action, the bond market has already priced in a series of expected rate cuts, default risk indicators have declined, and stocks have surged, reflecting investor confidence in a soft landing for the U.S. economy.
Reviewing the market performance over the past month: the S&P 500 index rose 2.3% in August, ETFs tracking long-term Treasury bonds increased by 1.8%, and investment-grade bonds rose by 1.5%. The four major asset ETFs (SPY, TLT, LQD, HYG) all recorded gains of at least 1%, adding over $1 trillion in market value to U.S. stocks.
These trends suggest that cross-asset bulls believe Federal Reserve Chairman Powell can manage to cut rates while achieving a soft economic landing. However, until the Federal Reserve’s policy meeting on September 18th, market movements will largely depend on economic data.
Lindsay Rosner, Chief of Multi-Sector Investments at Goldman Sachs Asset Management, stated, "Everything needs to go right. We need to maintain growth-friendly economic trends, and the labor market should neither overheat nor cool too much, so that consumers can continue to spend. All these factors must remain in perfect balance."
While the market has returned to normalcy, the "Black Trading Day" in early August still exposed some trading vulnerabilities. The non-farm payroll data for July in the U.S. caused market turmoil, sending Wall Street's fear gauge, the VIX, soaring above 65, and leading to successive drops in U.S. stocks, especially tech stocks.
Industry insiders noted that this short-term market turbulence provided investors with a lesson: popular bets, such as going long on AI themes and yen-financed carry trades, could suddenly reverse.
New market trends are emerging. This year, the U.S. stock rally has been primarily driven by tech giants, but the range of rising stocks has expanded in recent months. More investors are turning their attention to previously overlooked sectors such as small-cap stocks and economically sensitive industries.
The Russell 2000 index, dominated by small-cap stocks, and the equal-weighted S&P 500 index have outperformed the benchmark S&P 500 index since the end of June. Traders now seem interested in various assets, from small-cap stocks to speculative debt, believing that despite recent weak labor market data, the U.S. can still avoid a recession.
However, stock valuations remain high. According to FactSet data, the forward P/E ratio of S&P 500 constituents for the next 12 months is about 21 times, significantly higher than the 10-year average level of 18 times.
Currently, credit spreads, which reflect the level of economic concern among investors, remain low, indicating that investors are not too worried about default risks. Although there was a brief widening of spreads following weak July employment data, it quickly reversed, suggesting that investors need more bad data to prompt them to sell off assets.
In the U.S. Treasury market, the yields on 2-year and 10-year Treasuries are nearing the end of a more than two-year inversion, a situation that often signals a recession or imminent Federal Reserve rate cuts. Federal Reserve officials have indicated that even without further signs of labor market weakness, they plan to gradually cut rates, which may normalize the yield curve without causing a recession.
Nevertheless, some market participants remain cautious. Jack McIntyre, Global Bond Portfolio Manager at Brandywine Global Investment Management, said it is almost impossible to predict the post-pandemic economic trajectory. He believes, "A soft landing is just the delay of a hard landing. I don’t think we’ll go from a soft landing to no landing."
This Friday, the U.S. Department of Labor will release the latest non-farm payroll data for August, which will be closely watched by investors. Given the current focus on economic growth, the performance of this key macroeconomic data could significantly impact market sentiment. Federal Reserve Chairman Powell stated at last month’s Jackson Hole global central bank symposium that the direction of future policy is clear, but the timing and pace of rate cuts will depend on new data, evolving outlooks, and the balance of risks.
