On Wednesday local time, the Federal Reserve cut interest rates for the first time since March 2020. The stock market initially reacted tepidly, and after a volatile trading session, all three major U.S. market indices closed lower.

While it is not advisable to overinterpret the daily fluctuations of the stock market, there are several key factors believed to have caused the dramatic market volatility on Wednesday.

Firstly, the Federal Reserve decided to cut interest rates by an unconventional 50 basis points, instead of the common 25 basis points, which some have seen as evidence of the central bank "being behind the curve" - meaning it should have started cutting rates months ago to stimulate the economy.

Secondly, the Federal Reserve's more moderate expectations for future interest rate cuts until the end of 2025, much lower than investors' expectations of continued aggressive rate cuts, may have made some market participants concerned about the drag of high rates on the economy.

However, on Thursday, investors' fears seemed to have eased. With initial jobless claims dropping to the lowest level since May, manufacturing surveys showing more resilience than expected, and key wage indicators rising, the economy appears relatively robust.

In fact, according to Eric Wallerstein, Chief Market Strategist at Yardeni Research, the Federal Reserve does not appear to be behind the curve. "The Fed and the market are both extremely worried about unemployment, because history always repeats itself and that’s what we were primarily concerned about. Then we get the data and actually the manufacturing has been self-improving, jobless claims are the best since the summer, and the Fed cuts by 50 basis points, and you get a kind of 'nirvana,' right? The Fed is cutting rates with the U.S. being one of the strongest economies in recent years."

Three signs of unexpected resilience in the U.S. economy:

Initial jobless claims

Investors have long been concerned that long-term high interest rates would eventually lead to a series of layoffs. For a while, they have had evidence to support this theory, namely the steady increase in initial jobless claims.

But this week is different. The number of initial jobless claims for the week ending September 14th was 219,000, the lowest level since May, down from 231,000 the previous week.

At the same time, the number of people receiving unemployment benefits has dropped to a level not seen since early June. The number of people receiving actual unemployment benefits decreased by 14,000 to 1,829,000 as of the week ending September 7th.

Chris Larkin, Managing Director of E*TRADE Trading and Investing at Morgan Stanley, said in an email: "The first economic data after the 'significant' rate cut should make the Fed happy. The lower-than-expected number of initial jobless claims will not immediately trigger excessive concern about a slowdown in the labor market."

Wallerstein agrees with this view. "The number of initial jobless claims and continued jobless claims are both declining, and people are worried that this upward trend will continue. But that's not the case. There is no evidence of a slowdown or recession."

Manufacturing survey

The manufacturing sector in the U.S. has been dealing with various issues for years, from supply chain disruptions during the pandemic to rising labor costs. As this industry is often seen as an indicator of economic health, its weakened activity has raised concerns about the sustainability of U.S. economic growth.

However, once again, these concerns seem to have been alleviated recently. On Thursday, the Philadelphia Fed Manufacturing Business Outlook Survey showed that manufacturing activity in Delaware, southern New Jersey, and central and eastern Pennsylvania has turned positive, reversing the summer decline.

Prior to this, the Empire State Manufacturing Survey released by the New York Fed on Monday showed that business activity in the region grew for the first time in over a year. Yardeni Research's Wallerstein pointed out that the "improved activity" in multiple manufacturing surveys is a good sign for bearish investors worried about economic weakness or the Fed lagging behind the situation.

Wage growth

After falling from a peak of 9.3% in early 2022 to 3.1% in May of this year, wage growth may finally reach a turning point. According to Indeed's Wage Tracker, nominal wage growth in August increased by 3.3%, which the company described as "broadly stable."

Indeed's economists Nick Bunker and Allison Shrivastava commented on this data, stating, "In short, with nominal wages growing at the same steady and sustainable pace that we saw before the pandemic, the Indeed Wage Tracker indicates that the US labor market may be entering a new normal."

Once again, Wallerstein believes this data is a good sign for economic growth and also helps alleviate concerns among investors about labor market deterioration. "Real wages are growing, outpacing inflation, and people are spending," he said.

Stable wage growth, the resilience of the manufacturing sector, and evidence of a lack of large-scale layoffs lead Wallerstein to believe that the market can continue to rise, despite some intermittent fluctuations. He said, "As long as the economic growth exceeds expectations, you don't need to worry."

Editor/ping