Stock Market Sell-Off: 3 Reasons Why It Could Be Over
For a few days, it looked as if the bull market that began in late 2022 was screeching to a halt. All major indexes fell in recent weeks. The Nasdaq Composite Index even officially crossed into correction territory.
However, these indexes have rebounded significantly over the last few days. Is the stock market sell-off over? It could be. Here are three reasons why.
Image source: Getty Images.
1. Employment isn't as bad as initially thought
Disappointing July employment numbers provided a stark wake-up call for investors earlier this month. Hiring declined sharply, while the unemployment rate rose for the fourth-consecutive month.
Some investors were especially concerned that the "Sahm Rule" was triggered. This rule, named after former Federal Reserve economist Claudia Sahm, states that a recession is likely already underway if the unemployment rate three-month average increases by 0.5% above its low over the past 12 months.
However, Sahm herself doesn't think her rule is applicable now. She believes that factors including Americans dropping out of the workforce and surging immigration have caused her recession indicator to be less reliable.
Also, the number of jobless claims in the first week of August declined by 17,000 from the previous week to 233,000. This was well below estimates. Some economists now think that the impact of Hurricane Beryl and summer shutdowns at automobile factories could have caused the unemployment rate to climb, with the overall employment picture not as bad as initially thought.
2. The "carry trade" has nearly wound down
Another factor behind the recent stock market sell-off was the Bank of Japan's interest rate increase. Some investors had been borrowing Japanese yen at super-low interest rates and using the money to buy U.S. stocks. The Japanese rate hike disrupted this "carry trade," with investors selling stocks to cover their loans.
Japan's interest rate is still low at 0.25%. However, it was previously 0.1%. This increase of 2.5 times caused a global impact because the carry trade involved an estimated $4 trillion.
The good news, though, is that JPMorgan believes that roughly 75% of the Japanese yen carry trade has already unwound. If so, the worst should be over.
3. Near-term Fed rate cuts seem likely
There's even better news for investors: Near-term Fed rate cuts seem likely. The concerns about July employment numbers could increase the probability of a larger rate cut.
Federal Reserve Chairman Jerome Powell said last month that "a reduction in our policy rate could be on the table" in September. The Fed especially watches two things -- inflation and employment. If inflation continues to trend downward, look for a rate cut in September.
And it might not be the only one this year. Powell said that he could envision a scenario where there are "several cuts" by the end of 2024.
Rate cuts are good for businesses because it lowers their borrowing costs. While the stock market doesn't always rise following a reduction in interest rates, it often does.
A "dead cat bounce"?
It's still possible that the current stock market rebound could merely be a "dead cat bounce." Such bounces don't last long and give investors a false sense of hope.
What should investors do with this uncertainty? The best strategy is to focus on the long term. Buy and hold index exchange-traded funds (ETFs) and stocks of companies that have solid businesses that should grow over the next decade and beyond. Whether or not the stock market sell-off is over now, it won't last forever.
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JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool company. Keith Speights has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends JPMorgan Chase. The Motley Fool has a disclosure policy.
