August 26, 2024

After Thursday’s downside selloff after a higher start, on Friday the market finally heard from Fed Chairman Powell that interest rates are coming soon to help the economy.

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The major indices rose nicely after he said in a highly anticipated speech that the time has come to lower the federal funds rate from a two decade high and as a result the S&P has pushed back to within 0.6% of its all-time record set last month and has clawed back virtually all of its losses from a brief but scary summertime swoon. As a result, it gained 64 points to 5634 with a very late upside spurt. The Dow Jones Industrial Average rose 462 points to close above the 41,000 level for the first time since it set its own record in July, while the Nasdaq composite jumped by 258 up to 17,877.

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The real winner was the Russell 2000 Index of small stocks which rose by a large 68 points to 2218, a gain of 3.2%. Smaller companies can feel greater benefit from lower interest rates because of their need to borrow to grow. The VIX, which had been inching up a bit earlier in the week, dropped to 15.86 as stocks did well.

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Powell’s speech marked a sharp turnaround for the Fed after it began hiking rates two years ago as inflation spiraled to its worst levels in generations. The Fed’s goal was to make it so expensive for U.S. households and companies to borrow that it slowed the economy and helped bring down inflation.

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While careful to say the task is not complete, Powell used the past tense to describe many of the conditions that sent inflation soaring after the pandemic, including a job market that “is no longer overheated.” That means the Fed can pay more attention to the other of its twin goals: to protect an economy that is slowing but has so far defied many predictions for a recession. “The time has come for policy to adjust,” Powell said. “The direction of travel is clear, and the timing and pace of rate cuts will depend on incoming data, the evolving outlook, and the balance of risks.”

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That second part of his statement held back some of the details that investors wanted so much to hear.

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Treasury yields had already pulled back sharply in the bond market since April on expectations the Federal Reserve’s next move would be to lower its main interest rate. The only questions were by how much the Fed would cut and how quickly it would move.

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A danger is that traders have built their expectations too high, something that they have frequently done in the past. Traders see a high likelihood the Fed will cut its main interest rate by at least 1 percentage point by the end of the year, according to data from CME Group. That would require the Fed to go beyond the traditional move of a quarter of a percentage point at least once in its three remaining meetings scheduled for 2024.

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If their predictions are wrong, which has also been a regular occurrence, that could mean Treasury yields have already pulled back too much since their decline began in the spring. That in turn could pressure all kinds of investments. On Thursday, for example, the S&P fell to its worst loss in more than two weeks after Treasury yields climbed.

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In the S&P index of big companies, more than 85% of the stocks climbed. The strongest push upward came from NVDA, which rose by 4.5%.

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Its stock has been shaky this summer amid worries that investors took it and other highly influential big tech stocks too high in their mania around artificial-intelligence technology. But it has been charging back recently ahead of its highly anticipated profit report on Wednesday afternoon. Most of the other companies in the S&P have been reporting better-than-expected profit so far this reporting season, as is usually the case.

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ROST advanced after topping analysts’ estimates for profit and revenue during the latest quarter. But the C.E.O. also said the retailer’s low- and moderate-income customers continue to feel the pressure of high prices across the economy, even if inflation has slowed. This is a concern that many CEOs have been echoing recently.

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That gain helped offset an 8% tumble for RRGB, which reported a worse loss for the latest quarter than expected. It cited a slowdown across the restaurant industry.

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In the bond market, the yield on the 10-year Treasury fell to 3.79% from 3.86% late Thursday. The two-year Treasury yield, which moves more closely with expectations for action by the Fed, dropped to 3.91% from 4.01% late Thursday.

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In stock markets abroad, indexes rose modestly in Europe after finishing mixed across Asia.

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The Nikkei 225 added 0.4% in Tokyo after the Bank of Japan appeared to indicate more increases to interest rates may be coming, but they would be gradual.

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The Bank of Japan helped set off a scary swoon in early August in financial markets after a rate hike that forced many hedge funds and other investors to abandon a popular trade all at once. An ensuing assurance from a top bank official that it wouldn’t raise rates again as long as markets were unstable helped calm conditions.

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The second-quarter earnings season finally comes to an end this week with more retailers reporting, plus the big one on Wednesday afternoon. The lineup is as follows: today – PDD; Tuesday – PVH and JWN; Wednesday – ANF, CHWY, CRWD, FIVE, HPQ, KSS, NTAP, OKTA, SJM, Dow component CRM and a company that begins with an N and ends in A; Thursday – ADSK, BBY, DELL, DG, GPS, MBD, ULTA.

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Economic reports will have: today – July final durable goods orders; Tuesday – August consumer confidence; Thursday – weekly jobless claims, next reading on 2Q G.D.P.; Friday – July personal income and spending, final August U. of Michigan Consumer Spending estimate and then the big one here, namely the July P.C.E. beloved by the Federal Reserve.

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