The US stock market has been moving in one direction and one direction alone and that is to the upside and smart money has become nervous now that may be this stock market has gone too far and too fast which usually leads to a stock market crash. The factor that is making them more uncomfortable is the massive divergence in the monetary polices of two major economies and that is the US and Japan. Last month we saw massive volatility in the the Japanese yen and the Japan is one of the most important player when it comes to holders of the US treasuries.
Background
The US stock indices are on track to record solid gains for this month, and many believe that the market is entering in an uncharted territory which could lead to things in not to so many good places. However, bulls do argue that the current rally in the market is on the back of the sell off that we experienced in the previous month. The sell-off for US stocks began a few months ago, and this was manly due to concerns that the Fed may not cut the interest rates more aggressively. Ironically, the Fed has been denying any signs of weakness in the US economy. However, the red hue prevalent in the US market has amply demonstrated that risk-takers are no longer at ease with the Fed’s position, underscoring the urgent need for change.
Stock Market Today
To put things in perspective, the Dow Jones index, also known as the US 30 index is up nearly 12% year to date. Usually, when the Dow Jones index soars this much, it gives a very clear sign to traders that things are getting out of control as there is more greed among investors and traders. The Nasdaq 100 index, also known as the tech 100 index, is pilling on gains and has scored some strong gain. To put things into perspective, the index is up whopping 18% YTD and this is despite the fact that we have seen really serious correction for the one of the most important tech stock—Nvidia. entered into correction territory last week. As for the S&P 500, it is certainly leading all the indices as the gains stands much taller than any other US stock index—the index has gained over 21% so far this year and this is making many traders nervous that going into later part of this year we could see some serious steam coming out of this index..
Why Is The US Stock Market Rising?
Before, we get into the reasons that why the stock market is rising so much we needs to understand why the stock market was falling before There were a number of reasons that which pulled the US stocks back to their reality.
Firstly, the US’s economic data was off the rails for some time. For instance, if we looked at the previous US NFP data and the unemployment rate, you could see that both came off their tracks, as the unemployment rate in the US started to climb and the US NFP data started to show that the US economy was producing lower job numbers.
The second reason that traders were worried about, and the most important one, was the fact the Fed was not ready to take action with respect to their monetary policy. The Fed continued to assert that the US economy was robust, and the stance was that the Fed would only lower the rates more gradually. However, after the few US NFP data print, market players started to think that the Fed should take aggressive approach towards their policy, which means that the first cut should a 50 basis point.
Now, the reason that the stock is moving higher is purely because the Fed did what the market was anticipating which is to cut the rates by 50 basis points and the expectations are that the Fed would cut the rates more aggressively later in the year as well.
Should You Be Worried About the Current Sell-Off?
Many believe that the Fed is going to slow down the process of cutting the interest rates more aggressively and this is because if the Fed continues the process at the same pace it may make the inflation in the US to make a U-turn—which would be a highly undesirable scenario. Hence, the narrative is that the Fed is going to have put a break on their aggressive measures and that would happen at a time when the economic data would already by displaying weakness – as the current US Manufacturing PMI is showing. This could create a massive chaos.
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