Exuberance on Wall Street: Dow Jones and S&P 500 at record levels
The U.S. stocks closed higher on Thursday following a boost from robust Gross Domestic Product (GDP) data. The S&P 500 and Dow Jones continued their winning streak for the sixth consecutive session. For the S&P 500, this marks the longest winning streak since December 14. Additionally, the Dow Jones recorded its fourth record close in 2024.
The Dow Jones rose by 242.74 points, or 0.6%, to 38,049.13 points. The S&P 500 also increased by 25.61 points, or 0.5%, to 4,894.16 points. The Nasdaq climbed by 28.58 points, or 0.2%, to 15,510.49 points.
The strong GDP report seems generally positive for the markets. These figures may be the most realistic obtained at this stage of the current economic crisis, as the U.S. economy has not yet been significantly impacted by the Federal Reserve’s monetary tightening aimed at reducing inflation to the central bank’s target rate of 2%.
The GDP reading came in at an annualized rate of 3.3% in the fourth quarter, surpassing economists’ expectations by a wide margin. This data paints a picture of a „soft landing” scenario for the economy.
Also, the significantly strong GDP report for the fourth quarter on Thursday is unlikely to alter expectations for interest rate cuts by the Federal Reserve this year.
Whether right or wrong, many traders are focusing on the possibility of a continued decline in inflation despite the growth happening in the United States.
The markets see a 46.2% chance of a quarter-point interest rate cut in March, up from 40.4% previously. Traders largely anticipate five or six rate cuts by December. Furthermore, yields have been decreasing from 6-month Treasury bonds to 30-year bonds.
According to analysts’ expectations, it will be more challenging when it comes to the timing of the first interest rate cut, but the Federal Reserve could cut interest rates in March based on declining inflation.
In a quarterly GDP growth analysis, since the Federal Reserve began raising interest rates in March 2022, as long as the job market remains robust and the economy remains flexible, the U.S. economy can avoid a recession.
From the above analysis, we can see that the balanced decline in inflation confirms the validity of the Federal Reserve’s decision to implement a prolonged interest rate stabilization period.
This makes a rate cut in March seem less likely, even though the upcoming weeks will also bring new economic data for the European Central Bank and the Federal Reserve to consider.
If inflation remains weak in the next three months, central banks may consider cutting interest rates in April. However, if inflation figures stabilize and strengthen more consistently, aligning with the Federal Reserve’s expectations, investors may be surprised by the duration central banks are willing to wait before initiating monetary easing this year.