The Dow Jones Industrial Average closed at a record high for the second day in a row on Thursday, surging over 500 points. The rally came after the Federal Reserve signaled that it may start cutting interest rates in 2024, earlier than previously expected.
Fed Hints at Potential Rate Cuts, Sparking Rally
On Wednesday, the Fed raised its benchmark interest rate by 0.5 percentage points, bringing it to a range of 4.25% to 4.5%. This was the smallest hike since the central bank started rapidly raising rates in March.
In his press conference, Fed Chair Jerome Powell said that 2023 should be a year of “significant declines in inflation” if the economy stays on track. While officials expect to keep rates elevated this year, they projected rate cuts starting in 2024:
| Year | Median Fed Forecast | Previous Forecast |
|---|---|---|
| 2023 | 5.1% | 5.1% |
| 2024 | 4.1% | 4.6% |
| 2025 | 3.1% | N/A |
Powell stated that it “makes sense to moderate the pace of our rate hikes as we approach the level of restraint that will be sufficient to bring inflation down.” This shift to a less aggressive stance sparked a rally in stocks. The Dow jumped over 500 points, closing at a new record high above 37,000 for the first time.
Markets See Longest Weekly Winning Streak Since 2017
With Thursday’s gains, the Dow capped its longest streak of weekly gains since 2017. The index has climbed over 5% in the past five sessions amid growing optimism around inflation and rates.
Other major indexes also rallied to multi-month highs, with the S&P 500 ending over 3% higher on the week. The tech-heavy Nasdaq gained 4% across the five days.
Continued signs of cooling inflation have driven expectations that the Fed may be able to pause rate hikes sooner than anticipated. November’s consumer price index rose just 0.1% from the prior month, coming in below forecasts.
Many economists now predict that inflation has already peaked. Along with the Fed’s updated projections on fewer rate hikes next year, this has boosted investor sentiment.
What’s Next: Volatility Still Expected with Key Economic Data
While the Dow and other indexes are trading around record levels, Wall Street faces event risk next week that could spark more market swings.
On Tuesday, November’s producer price index will provide insight into how quickly wholesale inflation is declining. Economists predict that PPI increased just 0.1% month-over-month.
Additionally, the Commerce Department will release November retail sales data on Wednesday. This will show how strongly consumer spending held up during the start of the holiday shopping season amid high prices and economic uncertainty.
Finally, investors will closely watch third quarter GDP figures on Thursday. Updated estimates suggest that the economy grew by 2.6% last quarter, rebounding from the prior period’s decline.
So while rate cut hopes have powered recent gains, traders remain cautious about potential volatility surrounding these pivotal economic reports next week.
Dow Rally Driven by Industrial, Financial Stocks
The Dow’s surge to an all-time closing high has been driven largely by sharp gains in shares of industrial and financial companies over the past month.
Top performing Dow stocks on Thursday included:
- Boeing (BA): +4.2%
- Goldman Sachs (GS): +3.8%
- Caterpillar (CAT): +2.9%
These companies and banks like JPMorgan Chase (JPM) have benefited from the prospect of lower rates, which could stimulate business investment and lending activity.
Meanwhile, Apple (AAPL) and Microsoft (MSFT) lagged the price-weighted Dow’s rally on Thursday, though big tech stocks have also seen robust gains across the week on easing inflation data.
With support from both cyclical and growth shares, analysts see room for additional market advances if upcoming economic indicators continue trending positively. This could set the stage for Wall Street to extend its winning streak into 2023.
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