Traders work on the floor at the New York Stock Exchange (NYSE) in New York, U.S., January 19, 2024.
Brendan McDermid | Reuters
The stock market continues to climb to new heights as investors focus on the good and ignore the bad, no matter how bad the bad parts may seem at times.
The prospect of an economic slowdown, geopolitical turmoil and turmoil in Washington are not spooking market participants mainly because none of these threats have turned into much of a reality.
What has instead taken center stage is an economy that is performing remarkably well, inflation is subsiding, and a series of positive developments in Big Tech that have surpassed any odds the market had to endure.
“If investors are looking for a reason to be negative, it’s hard to find one,” said Mitchell Goldberg, president of ClientFirst Strategy, a financial advisory firm. “The 24-hour news cycle is so intense. But the fact is, a lot of it is noise and a lot of it has nothing to do with finance and personal finance. There’s such an overload of information now. But to break it down and put a perspective on things, what’s not to like about the stats coming in?’
As it has digested various headwinds and tailwinds, the market is pushing toward a record close. In fact, the S&P 500 surpassed its intraday peak on Friday, continuing the momentum that had been built through the end of 2023.
The big tech players have led the way. Juniper Networks, Nvidia and sophisticated micro devices are the industry’s three biggest gainers this year S&P 500in part by enthusiasm for artificial intelligence production technology.
A stable economy is a boost
At the same time, economic data outside of manufacturing and housing was mostly solid, especially when it comes to the seemingly unbreakable labor market. As expectations are high that higher interest rates pose a threat to continued hiring growth, Initial jobless claims last week fell to the lowest level since September 2022.
Along with comments from several Fed officials, the tight labor market has taken away some of the market’s expectation of rate cuts this year.
Where the market a week ago was all but certain that the Fed would start tapering in March and follow through with moves of six more percentage points this year, the pricing changed on Friday. Traders in the Fed Funds futures market now believe there is less than a 50% cut in March and now see a higher chance of five cuts this year, according to CME Group data.
However, markets remained positive even with low prospects for policy easing.
“In terms of the Fed raising rates, that’s confirmed that as long as rate hikes don’t break anything,” the market is fine, Goldberg said. “I don’t see anything breaking down. There’s no subprime debt crisis, I don’t see a mortgage crisis. … There have been a lot of big, bold predictions, and one by one they don’t happen, or they just get pushed to next year.”
Resistance to interest rate increases
Indeed, the market has behaved well since the Fed began raising rates — 11 times worth of 5.25 percentage points in the most aggressive cycle dating back to the early 1980s. Since first rising on March 17, 2022, the S&P 500 has gained more than 8%. Since the last rise on July 27, 2023, the large-cap index has risen more than 5.5%.
Now the market is anticipating, perhaps a little less eagerly, that the Fed is going to start tapering.
Investors are “optimistic about where the bullish is going,” meaning a lower fed funds rate, Bank of America chief investment strategist Michael Hartnett said in a note to clients on Thursday.
The combination of a tough economy with a more accommodative Fed and an outperforming tech sector makes for a winning formula.
“The seven big names [in tech] they have become like a chimera. They appeal to two very different economic backdrops,” said Quincy Krosby, chief global strategist at LPL Financial. “One is that we fear that the economy is slowing down dramatically. The other is that they are AI-specific catalysts because the market has focused on business growth with mega-technology and business innovation for productive AI. And now what you’re seeing and companies are reporting is monetizing it.”
Krosby specifically mentioned the gains that stood out from Semiconductor Taiwan as a bellwether for the industry and the promise of disruptive technology. “This is something the market has been waiting for,” he said.
Then there is the economy.
With the labor market enduring inflationary pressures and higher interest rates, this opens the door for greater spending power this year. Consumer sentiment reached its most optimistic level since July 2021, according to a University of Michigan survey released Friday.
“You always look for your first signs of a recession. They come immediately from the labor market. What you see is that the fundamentals of the economy are helping to sustain consumer spending, which is 70% of the economy,” Krosby said. . “This is a setting that the market appreciates.”
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