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S&P 500, Dow Jones hit all-time highs as flagship index gains over 700 points
Investors are confident that the Federal Reserve will cut interest rates by the end of its September meeting.
On Tuesday morning, markets were pricing in a 100% probability of an interest rate cut in September, according to CME FedWatch Tool, compared to 70% a month ago.
The increased confidence comes after a better-than-expected inflation rate in June, combined with signs of further slowdown in the labor market. In short, economists and investors interpreted the data to mean the Fed will soon begin cutting interest rates as inflation moves closer to its 2% target.
“Recent data have shown continued labor market weakness and a substantial slowdown in inflationary pressures, particularly in the all-important housing sector,” Matthew Luzzetti, Deutsche Bank’s chief U.S. economist, wrote in a July 12 research note that included a projection of a September rate cut. “These developments should have a material impact on the monetary policy outlook.”
Fed Chairman Jerome Powell said Monday that recent data has “somewhat” bolstered the central bank’s confidence that inflation is falling toward its target. But the Fed chairman declined to elaborate on what exactly that means for when the Fed will cut rates.
“I'm not going to send signals about any particular meeting,” he said. “We're going to make those decisions on a meeting-by-meeting basis, based on how the data evolves and the balance of risks.” during an interview at the Economic Club of Washington.
Regardless of the exact date of this cut, investors are now convinced that interest rates are set to fall. This increased confidence that this cut is imminent has led to a general rise in stock markets.
The market's most popular sectors over the past year have underperformed as investors shifted to sectors outside of technology.
The Roundhill Magnificent Seven ETF, which tracks the group of big tech stocks that led the 2023 stock market rally, has fallen more than 3% over the past five days. Meanwhile, real estate (XLRE) and industrials (XLI), two interest-rate-sensitive sectors, have been the market’s biggest gainers over the same period, up about 5%.
The small-cap Russell 2000 Index (RUT) is up more than 10% and finally reached its 2022 high for the first time during the current bull market.
“If this trading continues, if the prospect of a rate cut is still in play for this fall, then we could finally see the bull wake up, and that would be good news for all investors,” Callie Cox, chief market strategist at Ritholtz Wealth Management, told Yahoo Finance on Monday.
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