Weekly Buzz: Last week's fear, this week's rally

Markets swung from selloff to rally in a matter of days last week. Nvidia beat expectations yet the S&P 500 and Nasdaq still fell. Headlines warned of AI valuations and fading rate cut hopes. By Monday, the S&P had recovered and the Nasdaq posted its strongest day since May.

Why the market bounce

Last week, New York Federal Reserve President John Williams signalled openness to a December rate cut, and that was enough to flip the odds from 30% to over 75% overnight. Alphabet’s upgraded Gemini AI model added to the market’s mood. The selloff gave way to a recovery as expectations shifted.

This is how markets function. Investors aren't just reacting to what's happening today; they're constantly reassessing what might happen next. When interest rate cut odds were fading, investors priced in a tighter monetary environment. When the Fed's tone softened, they repriced again.

Pullbacks are part of healthy market cycles. They feel uncomfortable, but they often set the stage for the next leg of growth by bringing valuations closer to fundamentals. That’s also why timing the market is so difficult. It requires being right twice: once on the exit, once on the re-entry. Investors stepping aside for clarity risk missing the recovery entirely.

 What’s the takeaway here?

Volatility rewards those who stay invested through it. The discomfort of a down week is real, but so is the cost of sitting out. A diversified portfolio, like General Investing, makes it easier to hold when headlines turn negative. Pair that with a habit like dollar-cost averaging – where you invest fixed amounts at regular intervals – and short-term swings become less about reacting and more about staying the course.

(For more on what the data says about market valuations, see our latest CIO Update: Is AI in a bubble?)

In Other News: Japan’s big stimulus – Less a question of if, more of yen

Japan unveiled a 21 trillion yen (US$135 billion) stimulus bill last week – its biggest since the pandemic – in a move that came as no real surprise. The newly installed Prime Minister Takaichi had promised bigger government spending to kickstart the economy. It’s well-timed: the economy shrank last quarter for the first time in over a year and a half.

The package includes cash handouts for families, a gasoline tax cut, relief for lower-income earners, and targeted investments in key sectors like semiconductors and AI. The government projects the stimulus will boost growth by about 1.4% annually. 

The trade-off is more debt. Japan’s debt-to-GDP ratio is still one of the highest in the developed world at around 240%. As markets price in rising inflation and bigger government spending, Japanese bond yields have hit multi-decade highs. Higher yields in turn have made these bonds more attractive to foreign investors, who are buying them at the fastest pace on record.

The stimulus is an ambitious attempt to revive demand today and support Japanese industries that could anchor growth over the next decade. For long-term investors, the question is whether this fiscal push translates into lasting economic momentum.

(Want to dig deeper into Japan’s outlook? Stay tuned for our upcoming CIO Insights next month!)

Simply Finance: Debt-to-GDP ratio

A country's debt-to-GDP ratio compares what it owes to what it produces in a year. Think of it like your total debt relative to your annual salary: if you’re earning $100,000 and have $50,000 in debt, you have a ratio of 50%. For countries, a higher ratio means more debt relative to the size of the economy.