The Dow Jones Industrial Average closed at a record high on Wednesday, as stocks rallied after the Federal Reserve signaled that it may cut interest rates in 2024. The Dow closed up 1.1% at 34,589, surpassing its previous record set earlier this year.
Fed Hints at Rate Cuts, Sparking Rally
In its latest policy announcement, the Fed raised rates by 50 basis points as expected but indicated it may start cutting rates as early as 2024. This was seen as a doveish signal by markets, sparking a rally in stocks and bonds.
The Fed also provided an improved economic outlook, noting recent data suggests moderating growth with a strong labor market. This gave investors confidence the Fed can tame inflation without severely hurting the economy.
“The Fed struck an upbeat tone by hinting at rate cuts in 2024 while asserting they can stick the landing on inflation,” said Mike Loewengart, head of model portfolio construction at Morgan Stanley Global Investment Office.
The Dow rallied 1.1% to a new closing record of 34,589. This marks a seven-week winning streak for stocks. The S&P 500 rose 0.75% and the Nasdaq gained 0.69% on the day.
Economic Data Beat Expectations
Upbeat economic reports this week also boosted sentiment. November retail sales rose more than expected despite concerns that higher prices and rates would curb spending.
Jobless claims also dropped to their lowest level since September, underscoring the economy’s resilience. This gave the Fed more latitude to set their policy outlook.
“The data confirms the Fed’s ‘disinflationary process has started’ narrative is playing out…the soft landing scenario is very much back in play,” said Vital Knowledge founder Adam Crisafulli.
Outlook Remains Strong
The record highs come amid broader optimism for 2023 on hopes that cooling inflation allows the Fed to ease policy. Many on Wall Street expect rates to be cut at some point next year.
“We think most of the histronics the Fed created this year by overtightening policy will be reversed, supporting risk asset prices,” said DataTrek co-founder Nicholas Colas.
Others note stocks are already pricing in perfection on policy. “It will be difficult for the market to substantially advance from here without perfect conditions,” said Cliff Hodge, chief investment officer for Cornerstone Wealth.
Still, fourth-quarter earnings season is around the corner, which could provide another catalyst. Analysts expect S&P 500 profits to rise by a mid-single digit percentage. Companies also appear to be adept at protecting profit margins despite concerns about the impact of inflation and higher rates.
Sector Performance
Nearly all sectors finished higher following the Fed announcement and improved economic data. Some notable movers:
- Tech and consumer discretionary stocks rose as higher growth firms are more sensitive to rate policy. Amazon gained 2%, Apple rose 1.2%, and Tesla added 3.3%.
- Financials rallied on higher rates. JPMorgan Chase and Goldman Sachs both gained over 2%
- Energy stocks also outperformed as oil broke above $75/barrel. Chevron and Exxon Mobil both hit 52-week highs.
Market Outlook
Markets are now laser-focused on inflation and Fed policy. The next major event is the December CPI report due on January 12th. An easing in price pressures would support the case for rate cuts next year.
Most on Wall Street expect continued volatility but see room for more gains in 2023 after this year’s rout. Stocks still appear moderately valued compared to history despite the recent bounce.
Ongoing risks include higher rates sparking an economic slowdown or recession. But policymakers maintain the U.S. can achieve a soft landing. This optimism is reflected in record highs for major indexes.
As the Fed remains data-dependent, strong jobs and inflation reports could alter the policy trajectory. But for now hopes are high that the worst is over for markets after a brutal year.
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