Key Takeaways
- Interest Rate Outlook Changing
- Russell And Dow Catching Up
- Quadruple Witching Could Add Volatility
In 1995, Michael Jordan sent a fax out with the words, “I’m back,” and the sports world lit up like a Christmas tree. On Wednesday, Jay Powell said cutting rates is probably the next question for the Fed to address and the financial world lit up like a Christmas tree. Now, as we head into “Witching” Friday, markets are looking to make it seven weeks in a row of gains.
On Thursday, the S&P 500 closed slightly higher bringing its gains for the week to 2.5%. The Nasdaq Composite was flat, but it too is up nearly 2.5% for the week. The biggest winners this week so far though are the Russell 2000, which is up almost 6.5% and the Dow Jones Industrial Average, up close to 3%. At the same time, we’ve seen a rally in the bond market that’s sent the yield on the benchmark 10-year down well below 4%. The drop in yields has also knocked mortgage rates under 7% for the first time since August.
As I mentioned above, Jay Powell played Santa Claus at his press conference on Wednesday following the end of this month’s Federal Reserve Open Market Committee (FOMC) meeting. Just two weeks ago, Powell was saying it was too early to entertain the notion of cutting rates. But he appeared to do a 180 degree turn this week, putting rate cuts on the table. As a result, the probabilities of a rate cut in March, according to the CME, are now 77% with a 68% chance of a quarter point cut. Looking out to the end of 2024, markets are now forecasting rates to be 4% or lower. The optimism over rates was further on display Thursday when the European Central Bank (ECB) and Bank of England (BOE) also left rates unchanged.
It’s fair to ask why the abrupt about-face from “higher for longer” to cuts being on the table. The answer is simply that the data coming in shows inflation measures cooling yet the economy maintaining strength. It’s a balancing act for the Fed and at this point, you have to give them some credit for a job well done so far. The latest data point showed retail sales in November were up 0.3%, which beat estimates of -0.1%. Again, growth, but at a measured pace.
One of the interesting aspects to the rally this week is the strength in both the Russell 2000 and the Dow. Much of the gains this year have been in tech, which tends to be a more interest rate sensitive sector. In the meantime, the Russell and Dow, while up, lagged the S&P 500 and Nasdaq Composite. Now, those laggards seem to be playing catch-up. Just this week, Caterpillar shares are higher by 10%. Deere is up nearly 7%. Boeing is up 5% so far this week. Goldman Sachs shares have rallied close to 10%. The list goes on, but my point is, we could simply be seeing laggards getting a year-end boost, or perhaps we’re seeing the beginning of a sector rotation. I think it’s too early to know for sure, but it’s something worth watching as the market stars have been able to distribute the ball a bit more this week.
Turning to some individual stocks in the news, Costco beat earnings forecasts with same-store sales coming in at 3.9%, ahead of estimates. The company said lower shipping costs were helping to bring down overall costs and also announced a special $15 per share dividend. In premarket, shares of Costco are higher by over 2.5%. Intel is indicated higher in premarket by over 2% after the company announced a new chip for PCs and data centers that will give the company a greater presence in AI. Also, Disney shares look to open slightly higher after activist investor Nelson Peltz nominated himself and former CFO, James Rasulo, to Disney’s board. Meantime, Lennar is indicated to open lower by 2.5%, that comes despite the company beating on estimates and commenting on business having stayed steady.
Finally, today is quadruple witching with stock options, futures, futures options and futures indices all expiring. These quarterly expirations can bring a little added market chop, especially at year end. However, in premarket, the VIX is down 3% to just over 12, hovering around its lowest levels of the year. As always, I would stick with your investing plans and long term objectives.
tastytrade, Inc. commentary for educational purposes only. This content is not, nor is intended to be, trading or investment advice or a recommendation that any investment product or strategy is suitable for any person.