The recent US jobs report, while soft, did not trigger fears of an impending recession. This has resulted in market optimism for a more dovish rate path from the Federal Reserve, with 134 basis points of easing now anticipated, bringing rates close to 3%.<\/p>\n
Consequently, the S&P 500 has experienced an increase of 22 points, a rise of 0.35%, reaching a record high of 6525. Additionally, the Russell 2000 has seen a more substantial increase, climbing by 1.3%.<\/p>\n
The market is running hot after the August jobs report showed payrolls slowing to a moderate 150,000, calming fears of an overheating economy. This isn’t weak enough to signal a recession, so we’re seeing the S&P 500 push to new highs around 6525. The real driver is the market now fully expecting the Fed to cut rates aggressively over the next year.<\/p>\n
Our main concern is that with 134 basis points of cuts already factored in, there’s little room for more good news to push us higher. With the VIX volatility index hovering near yearly lows around 13.5, option premiums are cheap. This makes buying protective puts on major indices like the SPX a low-cost way to hedge against any economic data that turns worse than expected.<\/p>\n
We’re seeing small-cap stocks in the Russell 2000 outperform, which makes sense as these companies are more sensitive to borrowing costs and the domestic economy. Traders could consider call spreads on the IWM ETF to play this continued catch-up trade, capturing upside while defining risk. Looking back, we saw a similar pattern in late 2019 when the Fed pivoted to cuts, which boosted smaller domestic firms first.<\/p>\n
The risk here is that the market is celebrating a slowing economy, which historically doesn’t end well. We remember the period from 2000 to 2001 when the Fed started cutting rates, but equities continued to fall as corporate earnings collapsed. This suggests that if upcoming inflation data prints hotter than expected, it could quickly reverse these rate cut expectations and punish the market’s current euphoria.<\/p>\n
For the next few weeks, we should favor strategies that have a defined risk profile, like credit spreads or iron condors. These trades can profit from time decay if the market moves sideways around its new highs, which is likely with so much good news priced in. The upcoming Consumer Price Index (CPI) report will be the next major catalyst, as a high number could unwind the entire rate cut narrative.<\/p>\n
Create your live VT Markets account<\/a>\u00a0and\u00a0start trading<\/a>\u00a0now. <\/b><\/p>\n","protected":false},"excerpt":{"rendered":" Soft US jobs data boosts market hopes for Fed rate cuts; S&P 500 hits record high.<\/p>\n","protected":false},"author":62,"featured_media":16991,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[59],"tags":[],"class_list":["post-30291","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-live-updates"],"acf":{"acf_article_selection_author":null},"aioseo_notices":[],"aioseo_head":"\n\t\t\n\t\n\t\n\t\n\t\n\n\t\t