Quick Look
- Historic Milestone: The S&P 500 surpasses 5,400 for the first time, driven by gains from Tesla, Apple, and Nvidia.
- Bull Market Anniversary: Celebrating 20 months of a bull market, highlighting investor confidence and economic resilience.
- Treasury Yields: Two-year yields drop by 17 basis points, signalling a shift towards safer assets and potential Fed rate cuts.
- US Dollar Weakens: The dollar falls against developed-world peers, boosting US exports and economic growth.
- Fed Rate Cut Expectations: The market anticipates rate cuts in late 2024 due to cooling inflation, supported by recent CPI data.
The S&P 500 recently achieved a significant milestone, topping 5,400 for the first time in its history. This milestone coincides with the 20-month anniversary of the current bull market, marking an impressive performance with a year-to-date gain of 14%. Notable rallies from key players have driven the market’s robust performance, with Tesla Inc., Apple Inc., and Nvidia Corp. all seeing their shares rally at least 4% on Wednesday. Additionally, Oracle Corp. soared by 12% following a blowout earnings report, contributing to the market’s upward momentum.
Bull Market Celebrates 20-Month Anniversary
As we celebrate the 20-month anniversary of this bull market, it’s clear that the S&P 500’s journey has been nothing short of remarkable. The index’s impressive climb reflects investor confidence and the resilience of the American economy. The notable rallies from major companies like Tesla, Apple, and Nvidia have played a crucial role in this upward trajectory, with each company posting significant gains and boosting the overall market sentiment. Oracle’s 12% surge due to outstanding earnings further underscores the strength and potential within the technology sector.
Treasuries Experience Significant Yield Movements
On the other side of the financial spectrum, Treasuries have seen notable movements, particularly in the two-year yields, which dropped by as much as 17 basis points. This marks the biggest slide since December and indicates a shift in investor sentiment towards safer assets. The drop in yields suggests that investors anticipate potential rate cuts by the Federal Reserve, reflecting a cautious yet optimistic outlook on the economic landscape.
US Dollar Loses Ground Against Global Peers
Meanwhile, the US dollar has experienced a drop against all its developed-world peers, highlighting a shift in currency dynamics. This dollar depreciation is influenced by various factors, including the recent economic data and the market’s expectations of future Federal Reserve actions. As the dollar weakens, it boosts US exports, making American goods more competitive globally and potentially driving further economic growth.
Fed Swaps and Rate Cut Expectations
The market’s anticipation of rate cuts has been fully priced in for November and December, with growing bets on a reduction as early as September. This sentiment is bolstered by the latest Core Consumer Price Index (CPI) data, which showed that inflation has slowed to its slowest pace in over three years. This trend suggests that we are in the early stages of a downward trend in inflation, providing the Federal Reserve with more room to consider easing monetary policy.
Recent data on easing inflation has renewed discussions about the Federal Reserve potentially cutting interest rates sooner than expected. Experts like Ronald Temple and Krishna Guha believe a rate cut in September is now a real possibility,though the Fed will need to see consistent progress before making a decision. The upcoming June meeting will be crucial in understanding the Fed’s stance and assessing their confidence in the inflation outlook. While the financial markets are optimistic about potential rate cuts, they should be prepared for the Fed to emphasize the need for continued progress on curbing inflation before any action is taken.
The Road Ahead: Fed’s Deliberations and Historical Context
As the Federal Reserve prepares for its upcoming meeting, the market expects the benchmark rate to remain steady. This will be the seventh consecutive meeting with no change. The rate decision will be announced at 2 p.m. in Washington. Thirty minutes later, Fed Chair Jerome Powell will hold a press conference.
Historically, the Fed has provided supportive rate policies months before a new bull market emerged. They have continued to cut borrowing costs long after a bull market is in progress. This is the 12th bull market since 1955. On average, rate cuts began 9.5 months before the start of a bull market. However, in 1966, the first cut occurred concurrently with the start of a bull market.
Andrew Brenner at NatAlliance Securities observed, “Powell remains very concerned about the employment report. Unlike typical Fed governors, he doesn’t want to remove support quickly. Therefore, we may still have room to grow. However, the risk-reward balance is becoming tighter.”
Chris Larkin at E*Trade from Morgan Stanley added, “The story isn’t over after the CPI report. The Fed wants to see a consistent trend of falling inflation. A September cut is still possible if we get more numbers like this one.”
Market Sentiments and Future Expectations
As we navigate these dynamic financial landscapes, insights from market analysts and key players are invaluable. Jason Pride at Glenmede noted, “Overall, this report likely shifts the focus back to two or three rate cuts in 2024.”
Ian Lyngen at BMO Capital Markets agreed. He said, “The softer inflation reading paves the way for the ‘dot plot’ to indicate 50 basis points of cuts this year.”
Quincy Krosby at LPL Financial summed it up well. “The Fed’s last mile toward price stability is getting shorter. This should help the FOMC.”
Today, they are preparing their dot plot and fine-tuning their statement. As a result, they can offer a more positive view on monetary easing. However, they will remind us they are still data dependent. They also need more confirmation that inflation continues to trend lower.
David Russell at TradeStation concluded, “Things are playing out as the Fed hoped. Therefore, Jerome Powell will probably be feeling good this afternoon. September could be back in play for a rate cut. Furthermore, the bears have nowhere to run and nowhere to hide.”
As the financial world watches closely, the interplay between the S&P 500’s historic performance, Treasury yield movements, US dollar dynamics, and the Federal Reserve’s monetary policy decisions will continue to shape the market’s future. With a blend of optimism and caution, investors remain poised for what lies ahead in this ever-evolving economic landscape.
