Global Markets Surge Following Federal Reserve’s Interest Rate Cut

On Thursday, global equity markets experienced notable increases as investors responded to the Federal Reserve‘s significant interest rate cut. Despite this, the bond market remains skeptical about the effectiveness of the Fed’s decision. The Dow Jones Industrial Average increased by 1.3% by early afternoon Eastern Daylight Time, the S&P 500 rose by approximately 1.8%, and the Nasdaq surged roughly 2.8%. The Dow reached a new intraday high of 42,105, and the S&P set a new record at 5,725. However, the Nasdaq still trails about 3% behind its peak in July.

This surge follows a turbulent trading session on Wednesday as Wall Street processed the Fed’s real-time decision to cut rates. Despite all three major U.S. indexes closing in negative territory initially, the central bank’s choice to reduce rates by 50 basis points instead of 25 was seen as more favorable to stocks.

International markets also rallied, with Hong Kong’s Hang Seng and Japan’s Nikkei 225 climbing around 2% each. Europe’s Stoxx 600 and the UK’s FTSE 100 both saw gains of about 1%. Prominent stocks such as Apple, Goldman Sachs, Nvidia, and Tesla rose more than 2%, with information technology emerging as the best-performing sector in the S&P, increasing by approximately 2.5%.

Despite the positive developments for stocks, the bond market has faced difficulties following the rate reduction. The yield on the benchmark 10-year U.S. Treasury note rose from 3.65% to 3.75% after the Fed’s announcement, marking the highest yield in two weeks. This increase reflects traders’ concerns that the Fed’s actions might be too aggressive given current inflation rates.

The Fed’s decision to lower the federal funds rate from a range of 5.25% to 5.5% down to 4.75% to 5% represents its first reduction since March 2020. While lowering interest rates typically boosts stocks by reducing debt financing costs and increasing corporate profits, there remain concerns about potential economic downturns.

In a client note, Tom Essaye, founder of Sevens Report, described the market reactions as a “sell the news” response, suggesting that the rate cut alone might not suffice to stimulate the economy. Although lower rates typically benefit stocks, if the economic conditions precede an extended downturn akin to 2007, the move may ultimately harm investors.