Fed Chair Powell's Rate Cut Remarks Fuel Market Surge

The S&P 500 nears its seventh straight week of gains

• Fed Chair Jerome Powell's rate cut hint sparks market optimism; robust gains persist, signaling potential sector rotation.
• Economic balance: cooling inflation amid sustained growth prompts Fed to contemplate rate cuts.
• Market rally sees resurgence in diverse sectors with Powell's rate remarks driving expectations of future cuts.

In 1995, Michael Jordan sent a fax saying "I'm back” and sent shockwaves across the sports world. Now, Federal Reserve Chairman Jay Powell has done something similar in the financial markets. Powell's mention of potential rate cuts on Wednesday during the Federal Reserve Open Market Committee (FOMC) meeting had an electrifying effect. It was akin to holiday lights brightening a Christmas tree. With the week culminating today, markets aimed to achieve a seventh successive week of gains.

Yesterday, the S&P 500 edged slightly higher, scoring a 2.5% gain for the week, while the Nasdaq Composite maintained a near 2.5% rise. Notably, the Russell 2000 surged almost 6.5%, and the Dow Jones Industrial Average made significant strides, nearing a 3% uptick. Concurrently, a rally in the bond market drove the benchmark 10-year yield to dip considerably below 4%, subsequently pushing mortgage rates below 7% for the first time since August.

Powell's unexpected openness to rate cuts marked a notable shift from his earlier stance just two weeks earlier, sparking a surge in probabilities for a March rate cut, now standing at 77% with a 68% chance of a quarter-point reduction. Market projections foresee rates hovering around or below 4% by the end of 2024, signaling a widespread optimism that got another boost yesterday when both the European Central Bank (ECB) and Bank of England (BOE) chose to maintain unchanged rates.

No more “higher for longer”

The pivot from a "higher for longer" outlook to contemplating rate cuts stems from recent data indicating a cooling in inflation and sustained economic vigor. This delicate balance presents a challenge for the Fed, but its adept handling of the situation thus far warrants acknowledgment. Retail sales data for November surpassed estimates with 0.3% growth, underscoring measured economic expansion.

Of particular interest during this week's rally is the resurgence in the Russell 2000 and Dow, traditionally overshadowed by the dominance of tech stocks in the market's ascent. Notable companies like Caterpillar (CAT), Deere (DE), Boeing (BA) and Goldman Sachs (GS) witnessed substantial increases in their stock prices, hinting at a potential year-end boost for previously lagging sectors or even the beginning of a sectoral rotation.

The market’s upswing

In corporate news, Costco (COST) surpassed earnings forecasts with a robust 3.9% growth in same-store sales, attributed partly to reduced shipping costs. The company also declared a special dividend of $15 per share, propelling premarket shares by over 2.5%. Intel (INTC) had a premarket surge of over 2% after unveiling a new chip for PCs and data centers aimed at bolstering its presence in AI. Disney (DIS) shares are poised to open slightly higher following activist investor Nelson Peltz's nomination of himself and former Chief Financial Officer James Rasulo to Disney's board. Conversely, premarket indications for Lennar (LEN) foresee a 2.5% decrease despite surpassing estimates and maintaining steady business.

As the market navigates the quarterly expiration phenomenon known as quadruple witching, involving stock options, futures and related indices, the potential for increased market turbulence exists, particularly given the year-end scenario. Despite that, the Chicago Board Options Exchange's volatility index (VIX), a measure of market volatility, shows a 3% dip in premarket, hovering near its lowest levels this year. Amidst these fluctuations, sticking to established investment plans and long-term objectives remains a prudent strategy.

JJ Kinahan is CEO of IG North America—which includes tastylive, tastytrade and IG's FX Business. Kinahan traded for 21 years at the Chicago Board Options Exchange. He serves on the CBOE Advisory Board and the SIFMA Options Committee. @thejjkinahan 

For live daily programming, market news and commentary, visit tastylive or the YouTube channels tastylive (for options traders), and tastyliveTrending for stocks, futures, forex & macro.

Trade with a better broker, open a tastytrade account today. tastylive, Inc. and tastytrade, Inc. are separate but affiliated companies.