Monday’s market rout generated plenty of hysteria among financial pundits and politicians (e.g., candidate Trump calling the one-day stock market decline “The Kamala Crash”). The hyperbole and handwringing among the chattering class seemed all the more ridiculous, then, when the market came roaring back on Tuesday.

A recession is unlikely, but by the same token, the Federal Reserve knows that it might have waited too long to cut interest rates. That’s why a rate cut is almost certain to occur at the next meeting of the policy-making Federal Open Market Committee (FOMC), held September 17-18.

Liquidity is the name of the game. When the Fed eases, stocks typically surge. Hang tough as market volatility increases; the rally has plenty of juice left. From my perspective, the bears are the dumb money.

Despite recent turbulence in equity markets, the underlying fundamentals remain strong and continue to support the ongoing equity rally. Concerns about a potential recession seem to me exaggerated.

Concerns about the future of U.S. economic growth triggered a risk-averse reaction in markets recently. These worries were intensified by a weaker-than-expected U.S. manufacturing report last Thursday and a disappointing jobs report on Friday.

However, it’s important to avoid overreacting to a single month’s data. The broader macroeconomic and fundamental environment remains favorable for several reasons.

The VIX pulls back…

The CBOE Volatility Index (VIX) soared on Monday but then plunged on Tuesday, as investors calmed down and stopped freaking out (see chart).

With signs of a softening labor market, there’s now a roughly 64% probability of a 50 basis point (0.5%) rate cut by the Fed at its meeting next month, according to CME Group’s FedWatch tool.

The bond market has already reacted, with the 2-year Treasury yield falling from over 4.5% in late July to around 4% now. Lower borrowing costs should benefit interest rate sensitive sectors such as manufacturing and housing, bolstering overall economic growth.

Robust corporate earnings…

Last week’s market volatility was partly due to mixed earnings reports from tech giants such as Intel (NSDQ: INTC) and Amazon (NSDQ: AMZN). Intel missed earnings expectations and suspended its dividend, while Amazon exceeded expectations but offered cautious guidance.

Wall Street is starting to look askance at the massive investments that Big Tech is making in artificial intelligence (AI), showing impatience with the long lag time in profitable results. AI remains a mega-trend, but the mania has started to cool.

Despite these high-profile disappointments, the S&P 500 is on track for 11% year-over-year earnings growth in the second quarter, up from an initial expectation of 7.8% in early July and surpassing the 5.8% growth in the first quarter. For the full year, S&P 500 earnings are projected to grow by over 10%, providing strong support for equity markets.

Market volatility can be unsettling, but it’s a normal part of investing. Historically, the S&P 500 experiences about three 5% pullbacks and one 10% pullback per year.

The last two times the Fed cut rates, stocks responded positively. During the financial crisis of 2008, the Fed cut rates significantly. While the immediate response was mixed, stocks eventually rallied strongly as the economy started to recover.

In 2019, the Fed cut rates three times in response to global economic uncertainties and trade tensions. Stocks climbed higher, reaching new highs.

You should stay focused on your long-term goals and avoid making emotional decisions during these periods. Missing just a few of the best days in the market can significantly impact performance.

From 1994 to 2023, the S&P 500 returned over 10% annually. However, missing the 10 best days during this period would reduce the annualized return to 7.3%, underscoring the importance of a disciplined long-term investment strategy.

On Wednesday, the main U.S. stock market indices swooned again and closed lower as follows:

• DJIA: -0.60%
• S&P 500: -0.77%
• NASDAQ: -1.05%
• Russell 2000: -1.41%

Buckle up. The bull market is intact, but volatility won’t end anytime soon.

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Editor’s Note: If you’re looking for ways to generate high but safe income, regardless of today’s uncertain conditions, consider the advice of my colleague Robert Rapier.

Robert Rapier is the chief investment strategist of three premium services: Utility Forecaster, Income Forecaster, and Rapier’s Income Accelerator.

Robert is one of the world’s foremost experts on utilities, energy, and income investing, but his deep knowledge also extends into other profitable segments.

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John Persinos is the editorial director of Investing Daily.

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