The Stock Market Sell-Off: 3 Reasons It Could Be Over

For a few days, it looked as if the bull market that started in late 2022 had stopped. All major indices have fallen in recent weeks. The Nasdaq Composite Index it’s even officially crossed into correctional territory.

However, these indices have rebounded significantly in recent days. Has the stock sale ended? It could be. Here are three reasons why.

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1. Hiring is not as bad as first thought

Disappointing July employment numbers provided a strong wake-up call for investors earlier this month. Employment fell sharply, while the unemployment rate rose for the fourth month in a row.

Some investors were particularly concerned about triggering the “Sahm ​​Rule.” This rule, named after former Federal Reserve economist Claudia Sahm, states that a recession is likely already underway if the three-month average unemployment rate rises 0.5% above its 12-month low.

However, Sahm herself doesn’t think her rule applies now. She believes factors including Americans dropping out of the labor force and increased immigration have made her recession indicator less reliable.

Also, the number of jobless claims in the first week of August fell by 17,000 from the previous week to 233,000. This was well below estimates. Some economists now believe that while the impact of Hurricane Beryl and the summer shutdown of auto plants may have caused the unemployment rate to rise, the overall employment picture is not as bad as originally thought.

2. “Carry trade” is almost over

Another factor behind the recent stock market sell-off was the Bank of Japan’s interest rate hike. Some investors borrowed Japanese yen at very low interest rates and used the money to buy US stocks. Rising Japanese rates disrupted this “carry trade,” with investors selling stocks to cover their loans.

Japan’s interest rate is still low at 0.25%. However, previously it was 0.1%. This 2.5-fold increase caused a global impact, as transportation involved about 4 trillion dollars.

The good news, though, is that JPMorgan estimates that about 75% of the Japanese yen trade has already taken place. If so, the worst should be over.

3. Short-term cuts in Fed interest rates seem likely

There’s even better news for investors: Near-term Fed rate cuts look likely. Concerns about July’s jobs numbers could increase the likelihood of a bigger rate cut.

Federal Reserve Chairman Jerome Powell said last month that “a cut in our policy rate could be on the table” in September. The Fed watches two things in particular — inflation and employment. If inflation continues to fall, look for a rate cut in September.

And it might not be the only one this year. Powell said he could envision a scenario where there would be “more 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 cut in interest rates, it often does.

A “dead cat jump”?

It’s still possible that the current stock market rally is just a “dead cat bounce.” Such jumps do not 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 own index-traded funds (ETFs) and stocks of companies that have strong businesses that are expected to grow over the next decade and beyond. Whether the stock market selloff is over now, it won’t last forever.