‘Inflation Has Eased.’ Stocks Near Highs as Fed Signals Rate Cuts


Stocks are clawing toward record levels after the Federal Reserve confirmed hopes of a soft landing.

The S&P 500 rose 2.5 percent between Friday, December 8, and Friday, December 15. The index has advanced for seven straight weeks and is just 2 percent below its previous all-time high in January 2022. The Dow Jones Industrial Average has broken out and the Nasdaq-100 had its highest daily closing price ever.

“Inflation has eased,” central bankers said in their policy statement last Wednesday. They also increased the number of expected rate cuts next year and trimmed their inflation outlook. The dovish moves surprised investors expecting more of a cautious wait-and-see approach. Treasury yields fell to their lowest levels since July.

Other headlines bolstered hopes that inflation is moderating from its spike in late 2021 and early 2022. Consumer prices and wholesale prices were little changed in November. A separate survey by the New York Fed showed consumer expectations of inflation at their lowest level in 2-1/2 years.

Retail sales also beat estimates for the fifth straight month and initial jobless claims fell more than expected. Those points suggest consumption and employment remain healthy even as the economy eases and inflation slows.

In other words, investors could face a “soft landing.” That’s a potentially ideal situation when the Fed slows inflation without causing a recession. (1994-1995 was the classic soft landing. The recessions of 1981-1982 and 2007-2009 were “hard landings.”)

Homebuilders Surge

Biggest Gainers in the S&P 500 Last Week
SolarEdge Technologies (SEDG)+24%
Enphase Energy (ENPH)+20%
Broadcom (AVGO)+20%
Vertex Pharmaceuticals (VRTX)+17%
First Solar (FSLR)+16%
Source: TradeStation data

More than 80 percent of the S&P 500’s members rose last week. Stocks that benefit from lower interest rates led the move.

Homebuilders jumped to another record high and as the Fed’s moves spurred optimism about cheaper mortgage costs. Regional banks reclaimed levels last seen in early March. Solar-energy stocks, which fell sharply as rates climbed in September and October, were the single best-performing group.

Among the S&P 500’s 11 major sectors, real estate investment trusts rose the most. Materials and industrials, which stand to benefit from a stronger economy, followed. Traditional retailers and small caps also rallied.

Broadcom (AVGO) had its biggest weekly gain since the pandemic amid optimism about Artificial Intelligence (AI) and its acquisition of VMware. Vertex Pharmaceuticals (VRTX) jumped on positive results for a diabetes pain treatment.

Utilities Excelon (EXC) and Ameren (AEE) fell after Illinois rejected a proposed rate increase. Oracle (ORCL) slid after revenue missed estimates.

S&P 500, weekly chart, showing key patterns and levels.

Charting the Market

Last week’s surge followed a tight squeeze near levels from the summer. The S&P 500 is approaching old peaks from late 2021 and early 2022. Given the new highs in the Dow Jones Industrial Average and the Nasdaq-100, some traders may look for the bullish momentum to continue. That could be especially true given the Fed’s dovish stance.

Some market internals may be consistent with bullish price action. For example, the Advance/Decline Line set a new record last week and the most companies hit 52-week highs since mid 2021. Those points (from TradeStation data) may suggest stronger “breadth” as more stocks participate in the rally.

Measures of sentiment have also improved. The American Association of Individual Investors (AAII) noted that just 19 percent of respondents in their latest poll were “bearish.” It was the lowest total since January 2018. Some 51 percent are bullish, similar to readings in July. (Don’t forget AAII’s survey showed a historic turn as the rally began last month.)

The Week Ahead

Biggest Decliners in the S&P 500 Last Week
Excelon (EXC)-9.5%
Oracle (ORCL)-9.1%
Ameren (AEE)-8.1%
A.J. Gallagher (AJG)-7.5%
Pfizer (PFE)-7.5%
Source: TradeStation data

This week is the last full week of the year before Christmas next Monday, December 25. There are some housing reports and a few noteworthy earnings.

NAHB’s homebuilder sentiment index is scheduled for today.

Housing starts, building permits and FedEx (FDX) results come tomorrow.

Wednesday features existing home sales and Micron Technology (MU) earnings.

Initial jobless claims and the final revision of third-quarter gross domestic product are on Thursday.

Friday brings the Personal Consumption Expenditures (PCE) price index, an important measure of inflation. Personal income and spending, durable goods orders and new home sales are also due.

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