Nasdaq Reaches New Record High But Dow Giving Back Ground

U.S. equities exhibited mixed performance on Friday, with the Nasdaq reaching a new intraday record while the Dow declined, as market participants anticipate a widely expected 25 basis point rate cut from the Federal Reserve next Wednesday. This expectation is largely driven by recent data indicating subdued inflation and a weakening labor market, although September's consumer sentiment unexpectedly deteriorated and long-run inflation expectations rose. Concurrently, networking and housing stocks showed notable weakness, and the 10-year Treasury yield climbed 5.1 basis points to 4.062%.

Analysis

The U.S. equity market is exhibiting significant divergence, with the tech-heavy Nasdaq reaching a new record intraday high while the Dow has declined by 0.4% or 169.29 points. This mixed performance occurs as investors await the Federal Reserve's monetary policy decision, where a 25 basis point rate cut is widely anticipated with a 92.5% probability according to CME's FedWatch Tool. However, fresh economic data introduces uncertainty into the outlook. The University of Michigan's consumer sentiment index for September unexpectedly fell to 55.4, significantly below the 58.0 forecast, signaling potential consumer strain. Concurrently, while short-term inflation expectations held steady, long-run inflation expectations rose for a second consecutive month to 3.9%, a development that could temper the Fed's dovish stance. This tension is mirrored in the bond market, where the 10-year Treasury yield climbed 5.1 basis points to 4.062%, reversing its recent downtrend. Sector-level performance also points to risk-off sentiment in specific areas, with networking stocks falling 2.3% and housing stocks declining 1.4% after recent highs.

Key Decisions for Investors

• Investors should focus less on the widely expected 25 basis point rate cut and more on Fed Chair Powell's forward guidance, as the recent uptick in long-run inflation expectations to 3.9% could elicit a more hawkish tone regarding future cuts.
• The sharp pullbacks in high-flying sectors like networking (-2.3%) and housing (-1.4%) suggest potential profit-taking; it is prudent to monitor whether this weakness broadens or remains confined to these specific groups.
• Given the conflicting signals between dovish rate cut expectations and deteriorating consumer sentiment, investors should consider trimming exposure to cyclically sensitive sectors and remain cautious of potential market volatility following the Fed's announcement.