Best week of the year for stocks sees S&P 500, Nasdaq soar

Key points

• The S&P 500 and Nasdaq had their best week of the year last week.

• A strong August CPI inflation report helped spur stocks higher.

• The FOMC meets this week and is expected to reduce the federal funds rate.

The S&P 500 and Nasdaq had their best week of the year last week, wiping away losses from the previous week, which was the worst of the year.

Markets continue to be extremely volatile, prone to wild swings one way and the other. We saw that over the past two weeks as the major indexes had their best week of the year last week, following their worst week of 2024 the week before.

The Nasdaq Composite soared 5.9% last week, ending the week at 17,684. It gained back pretty much all that it lost the previous week when it fell 5.8% — the worst week of 2024.

The S&P 500 had a similar arc, rising 4% last week to 5,626, marking the best week of the year. It came one week after the worst week for the S&P 500, when it fell 4.2%.

The Dow Jones Industrial Average rose 2.6% last week to 41,394 after falling 2.9% the week before, while the small cap Russell 2000 gained 4.4% last week to 2,181 after falling 5.7% the week prior.

What caused stocks to rise and why are we seeing so much volatility?

Wild price swings

Wild swings in the stock market are nothing new, but the volatility we’ve seen over the past two months is a bit out of the ordinary.

Stocks have followed the same playbook in both August and September, with the market wildly overreacting to slightly disappointing economic news one week, then roaring back the next week on buying opportunities created by the previous week’s overreaction. Then you combine that with slightly favorable economic news that caused investors to think they probably overreacted the week before and now you have a huge rally.

That’s exactly how things played out last week, as stocks surged after the Consumer Price Index (CPI) was issued on Wednesday and it showed inflation had dropped to 2.5%, the lowest rate in 3.5 years.

The big gainers last week were some of the leading chipmakers, like Broadcom (NASDAQ: AVGO) and NVIDIA (NASDAQ: NVDA), which had been the biggest losers the week before. The markets overreacted to those companies’ mostly strong recent earnings reports, then bought on the dip last week.

For the big tech and growth companies, like NVIDIA, the recent volatility has more to do with their valuation than their earnings. Stocks, like NVIDIA, that continue to be overvalued with unusually high P/E ratios are going to continue to experience this kind of volatility, at least in the near term.  

50 basis point rate cut coming?

This week is one that investors have been waiting for for years — the week when the Federal Open Market Committee (FOMC) is expected to lower the federal funds rate.

The federal funds rate has been set at 5.25% to 5.50% since July of 2023 and it has not decreased since the start of the pandemic in March 2020.

The FOMC is expected to lower the fed funds rate, as annual inflation has come back down closer to the 2% goal and Fed Chair Jerome Powell said as much at the Jackson Hole Economic Symposium in late August.

The major question now is not when, but how much? Then when seems like it will be this week, when the FOMC meets September 17-18. How much remains to be seen.

The CME FedWatch survey now has the odds at 57% for a 50-basis point rate cut this week, compared to 43% for a 25-basis point reduction.

If the Fed does lower rates by 50 basis points, investors should expect a really good week for stocks. If it is a 25-basis point cut, which has already been baked in, the markets may take it more in stride.

The FOMC will post its decision on Wednesday at 2:00 p.m. ET.