By early October 2024, Wall Street had turned a Federal Reserve rate cut into a fresh run of record highs, only for a very unusual pattern in the bond market to raise questions about how long the rally could last. The S&P 500 and Dow Jones Industrial Average touched new all-time highs after a stronger-than-expected September jobs report, even as Treasury yields climbed rather than fell, defying the typical playbook for a Fed easing cycle. The divergence left investors debating whether the rally reflected genuine economic strength or a bond market flagging risks the equity market had yet to price in.
From a Jumbo Cut to Fresh Records
The Fed had cut its benchmark rate by 50 basis points on September 18, 2024, its first reduction since the pandemic, taking the target range to 4.75%-5.00%. Equities cheered the move, with the S&P 500 already sitting within a fraction of a percent of its September 26 record close heading into the following week. The September nonfarm payrolls report, released October 4, showed employers added 254,000 jobs, far above the roughly 150,000 economists had forecast, and pushed the S&P 500 and Dow to fresh record closing highs as investors grew more confident the economy could avoid a hard landing. Cyclical and small-cap shares, which typically benefit most from lower borrowing costs, briefly outperformed the broader market as a "soft landing" narrative gained momentum.
An Unusual Bond Market Response
What made the period notable was the bond market's reaction. In every one of the Fed's previous seven cutting cycles since the 1980s, the 10-year Treasury yield had been lower 100 days after the first cut. This time it moved the other way, climbing more than four basis points on October 4 alone to 4.024%, its highest level since early August, as traders pared back expectations for the pace of further easing. The CME Group's FedWatch tool showed the probability of another jumbo, half-point cut in November collapsing, with a quarter-point move priced at around 91%.
Records Give Way to Caution
The record highs proved difficult to sustain. Rising yields began to weigh on rate-sensitive sectors, and with the presidential election, ongoing Middle East tensions and uncertainty over the pace of future Fed cuts all in play, the S&P 500 ultimately closed October down about 0.9% for the month. The gap between a Fed actively easing policy and a bond market pricing in stronger growth and firmer inflation left both stock and rate traders navigating conflicting signals through the final weeks of the year.
What It Means for Traders
The episode is a useful case study in why rate cuts do not automatically mean lower yields or a one-way rally in equities. When bond markets and central bank action diverge, it often reflects shifting growth, inflation or fiscal expectations that deserve as much attention as the policy decision itself. For traders, watching the reaction in Treasury yields around Fed meetings and jobs reports, not just the rate decision itself, can offer an early signal of whether an equity rally has the underlying support to continue.
Daily market analysis by BCM Markets.