Santa Claus has really come to town — or at least Wall Street.
US stocks are set to close out the year at or near record highs as investors make optimistic bets that the Federal Reserve will cut interest rates, but experts warn the rally’s longevity into 2024 will depend on whether Fed Chair Jerome Powell maintains his dovish turn.
The broad-based S&P 500 hovered near its all-time high of 4796.56, closing just shy at 4,783.35 Thursday, amid the so-called Santa Claus rally — the last trading week of the year.
The Dow Jones Industrial Average inched up 53.58 to continue its string of record-breaking closes that have taken the index to nearly 38,000. The tech-heavy Nasdaq composite dipped 0.03% to finish at 15,095.14, about 6% below its record high of 16,057.44.
Still, it’s been a boom year for all three. The S&P 500 is up 24.6%, the Dow 13.8% and the tech-heavy Nasdaq an eye-popping 44.2%, putting it on on track for its best year since 2003.
“The last nine weeks of rip-your-face-off rally, 100% of the credit to the Fed,” Jake Dollarhide, CEO of Longbow Asset Management, told The Post on Thursday. “It’s all because of lower interest rates and perceived, anticipated Fed rate cuts in 2024.”
“Right now, we really do not want to step in front of Santa’s gift-laden sleigh,” added Scott Wren, senior global market strategist at Wells Fargo Investment Institute, in a note.
The S&P 500’s recent surge is driven in large part by the strength of the so-called “Magnificent Seven” stocks — Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla — which have swelled by between 50% and 240% this year.
The broader market joined the party after Fed officials teed up the possibility of three interest rate cuts at their meeting earlier this month.
The Fed’s projections for 75 basis points in cuts soothed the market’s concerns after a year of tight economic conditions tied to the central bank’s fight to tame inflation, which is still hovering above the Fed’s long-term target of 2%.
The next two-day Fed meeting will be held Jan. 30-31.
The rate has been held steady at between 5.25% and 5.50% after the last three meetings.
The likelihood of interest rate cuts has bolstered a market frenzy surrounding the rise of artificial intelligence, as Microsoft-backed OpenAI and Google unveiled new advancements and drove a wave of innovation in the burgeoning technology.
A CNBC survey of investors, traders and money managers found that “more than half believe” the Fed will start cutting interest rates in the second quarter of 2024.
Still, there is reason for investors to maintain a cautious stance entering the new year.
High prices for daily necessities like food and rent remain a cause for concern, and the US economy still isn’t far removed from the shocks that led ex-Treasury Secretary Larry Summers and other pessimistic market prognosticators to warn of a recession.
Lingering inflation could still force the Fed to rethink rate cuts – and cause stocks to tank again.
Elsewhere, some Fed officials have already tamped down expectations by stating it was premature to bet on “imminent” cuts.
“We think 2024 is going to be much more about inflation going back to target in a sustainable way or inflation getting ‘stuck’ and forcing the Fed to cut much less than the market expects (if they cut at all) and that latter scenario would be a big shock to equity markets and dent the current meltup,” said Chris Zaccarelli, chief investment pfficer for Independent Advisor Alliance.
Dollarhide pointed to Powell’s sudden about-face on any future hikes at the Fed’s December meeting as an indication that the US economy isn’t out of the woods.
“The danger that looms is if the Fed is cutting, why are they cutting? Does Powell know something we don’t know lurking beneath the surface?” Dollarhide said.
“Typically, he would evolve his Fed-speak over multiple FOMC meetings. He just did a hard pivot from hawkish to dovish,” Dollarhide said.
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