Wall Street ‘Nirvana’ Nears as Fed Fuels 2021-Style Risk Rally
(Bloomberg) — The Federal Reserve poured fresh fuel on the Wall Street rally this week, pushing September toward the broadest cross-asset surge since the 2021 frenzy — with fear in retreat and greed unleashed.
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An interest-rate cut meant to cushion the weakening labor market might once have sparked caution. Instead, it lit a fire under the risk complex, with the likes of junk bonds and shares of unprofitable tech firms advancing. Global equities hit record highs, while credit spreads tightened to levels last seen in 1998.
It’s the Great Resilience Trade — and Wall Street insists its logic is stronger than in past manias. In the 1990s, the defense was internet productivity. In 2021, it was zero rates and the rise of the retail trader. Now: an unbreakable consumer, a real AI boom, and a White House stepping back from the tariff cliff. That narrative, months in the making, is rewarding bold bets and balanced portfolios alike.
“Equity markets are reaching the closest thing to nirvana when economic growth is good enough and the Fed is looking to cut interest rates anyway,” said Matt Miskin, co-chief investment strategist for Manulife John Hancock Investments. “Markets are priced for perfection in a far-from-perfect world, but this week gave risk-on markets what they wanted.”
By lowering borrowing costs, Fed rate cuts make it cheaper for companies and households to spend, invest and expand — often juicing asset prices and valuations. And for now, the lure of cheaper money is outweighing concerns about why easing is needed in the first place.
That optimism is playing out everywhere. The S&P 500 is up for three straight weeks and 13% on the year. Unprofitable tech jumped 9% in five days. The Russell 2000 rose for a seventh straight week. High-yield bonds posted their longest rally ever.
Taken together, stocks, bonds and commodities are rising in rare tandem for a second month, a feat unseen since the stay-at-home investing frenzy of 2021. For now, the consensus remains soothing: growth is slowing but not collapsing, inflation has eased, and the Fed is willing to let asset prices run hotter in its bid to help the labor market. In that story, risk-taking is not reckless but rational.
That conviction may hold until inflation proves stickier or until the Fed cuts rates less than traders expect in the months ahead. Either way, the story of this rally is not simply that assets are rising together. It is that Wall Street has convinced itself there’s no such thing as too much optimism — at least not yet.
“To put it simply, every new high in the bull market should be bought except the last one and all that you need to know as an investor is why it’s the last one,” Dan Greenhaus, chief economist and strategist at Solus Alternative Asset Management, told Bloomberg TV. “And we have no indication yet that that appears to be happening.”
The question is whether this is a rational repricing for a lower-rate world? Or just the opening act of another Fed-fueled bubble?
Day traders, emboldened by Washington’s permissiveness, are piling into crypto and prediction markets, placing wagers untethered to economic fundamentals. The frenzy evokes shades of 2021, with speculative energy now coursing through a broader ecosystem of options and digital assets. The macro backdrop couldn’t be any different, defined less by lockdown delirium than by a surprisingly sturdy economy and a new tech cycle.
Still, Bank of America Corp. strategists argue the bubble fears may be premature. A study led by Nitin Saksena compares today’s Nasdaq 100 rally to the tech mania of the late 1990s and finds that by measures like price gains and volatility, the market is far from euphoric extremes.
“Eventually there will be perhaps too much artificial intelligence spend. But for right now, most of these big spenders can fund the spending out of free cash flow,” said Ellen Hazen, chief market strategist and portfolio manager at F.L. Putnam Investment Management. Her firm recently raised its equity holdings. “This has legs. And as we look at the earnings acceleration into next year, that’s really compelling.”
Investors appear to be echoing the Fed’s pivot away from inflation anxiety. Demand at this week’s Treasury Inflation-Protected Securities auction hit its lowest since 2022. A Goldman Sachs equity basket designed to benefit from stagflation — long inflation winners, short losers — just sank to a record low.
The risk, of course, is that markets are underpricing inflation’s return. Investors have embraced the pivot to easing, but the central bank is signaling fewer cuts next year than traders are betting on. Treasury yields climbed across the curve this week as bond markets began to recalibrate.
“The market is going to be disappointed — the Fed is not going to cut as much as is priced in,” said Brij Khurana, portfolio manager at Wellington Management. “There is not a lot of value in the credit market. Our positioning is more defensive, more than it has been for some time.”
Khurana has a few fellow skeptics. Beneath the market’s buoyant surface, signs of caution are visible. Short interest in the iShares Russell 2000 exchange-traded fund has climbed to a near two-year high. Bearish leveraged ETFs are seeing fresh inflows, while so-called haven vehicles tied to gold and cash have attracted money for four straight weeks.
To many, though, that lingering skepticism signals opportunity — untapped fuel for another leg higher.
“I would say people are buyers, but people are reluctant buyers,” said Raphael Thuin, head of capital markets strategies at Tikehau Capital. “We have many more rate cuts to come and common thinking is, don’t fight the Fed.”
