Last week, I was discussing the Dow touching its all-time high. After a week of range-bound movements, the Dow finally broke through the all-time high, boosted by hopes of a rate cut following the FOMC meeting.
Fed Chair Powell maintained the stance that rate hikes are still possible and continued to emphasize that the inflation enemy has yet to be subdued. However, the Fed’s dot plot suggested otherwise, with more committee members projecting a rate cut in 2024, ranging between 4.25% to 4.75%. This was the focus for investors, driving the rally yesterday.
This newfound optimism has also been reflected in the futures market, which is now predicting a 71% chance of a 0.25% rate cut by the Fed in March.
Treasury yields have fallen across the board, with the 5-year bond yield dropping below 4%. This further signals that investors believe rates are poised to be cut.
The Dow closed up by 1.4% at 37,090.24, marking the first time it has closed above the 37,000 mark. According to Tradingview, 152 US stocks reached all-time highs, including well-known names like Visa and Mastercard.
Apple stock has also reached a record high, becoming the third of the Magnificent 7 stocks to achieve this milestone in 2023, following Nvidia and Microsoft.
Small-cap stocks, which had been trailing large caps for most of the year, have experienced a strong rally in the past month to catch up. iShares Russell 2000 ETF (IWM) gained 8% in the past month, outpacing the 5% gained by S&P 500 ETF (SPY) and Invesco QQQ Trust (QQQ).
Before celebrating, it’s important to note that the track record of the first rate cut after a series of rate hikes isn’t favorable. Morgan Stanley found that in 7 out of 9 rate cuts, stocks fell with average declines of about 23% from the final rate hike. Therefore, the higher likelihood of a March rate cut may not bring good news.
Additionally, considering the presidential cycle, the third year typically performs the best, which has been the case this year. However, the fourth year tends to be weaker than the third, although returns are still better than the first two years of the cycle.
Of course, there are more factors influencing the markets than just rate cuts and the presidential cycle. I always believe in being reactive rather than predictive when it comes to the markets. Reacting quickly is better than making incorrect predictions. Therefore, investors should maintain confidence in this bull run unless the indices drop below the 200-Day Moving Average again.
