Dow climbs to fresh record as Fed rate-cut forecasts spur global markets rally

What’s driving markets

Investors remained in a buoyant mood after the Fed surprised traders by indicating its cycle of interest rate hikes was over and that senior policy makers expect to cut rates by 75 basis points in 2024.

More central bank decisions arrived early Thursday, with the Bank of England and European Central Bank leaving their interest rates unchanged at 5.25% and 4%, respectively. Although the ECB signaled it would halt its last remaining bond buying scheme — the €1.7 trillion ($1.9 trillion) Pandemic Emergency Purchase Program — earlier than expected in mid 2024.

The latest batch of U.S. economic data released Thursday was also benign, showing initial jobless claims fell by 19,000 to 202,000 in the week ending Dec. 9, the lowest level since mid-October. Data also showed sales at U.S. retailers rose a solid 0.3% in November in a good start to the holiday shopping season, suggesting the economy might not be cooling off all that much.

The prospect of lower U.S. borrowing costs next year has energized equities and bonds, pushing the Dow Jones Industrial Average to a record high and dragging the benchmark 10-year Treasury yield
BX:TMUBMUSD10Y
to its lowest print since early August. The momentum looked set to continue on Thursday.

See: Dow scores its highest close in history. Here’s what that means in the big picture.

“This unexpected shift resonated harmoniously with investors as the ‘rallying cry ‘ was heard from every corner of global financial markets.” said Stephen Innes, managing partner at SPI Asset Management, in emailed commentary.

“The Santa rally shifted into high gear in off-to-the-races fashion as Treasury yields bound towards 4%, and equities surged,” Innes added.

Indeed, the nascent Thursday session saw continued investor optimism, with 10-yearTreasury yields — which in October were above 5% — dipping further to 3.920% and stocks around the world extending their rally.

At least one major Dow component also reached a fresh record on Thursday: Apple
AAPL,
-0.76%,
the world’s biggest company by market capitalization, saw its shares advance to record highs.

The S&P 500, which has gained 22.6% so far in 2023, is now within 2% of its record high. An indication that the positivity is spreading beyond just the heavyweight technology stocks can be seen in the S&P 500 Equal Weight Index
XX:SP500EW,
which is sitting at its best level in 21 months.

However, there are signs that traders may be overly confident and the rally is overextended in the short term, some analysts observed.

The CBOE VIX index
VIX,
an option-derived gauge of expected S&P 500 volatility, which tends to fall when investors are bullish, was trading just below 12, its lowest in about four years.

“Technically the snapback in multiple sectors in the last month is certainly a positive heading into 2024. Unfortunately, U.S. equities show RSI readings at elevated levels and the risk/reward scenario certainly hasn’t improved after a [roughly] 13% rally in the last seven weeks,” said Mark Newton, head of technical strategy at Fundstrat.

Thursday’s earnings calendar includes reports from retailer Costco
COST,
-1.73%
and homebuilder Lennar
LEN,
+6.21%
will release results after the closing bell.

Companies in focus

• French media conglomerate Vivendi
  VIV,
  +9.96%
  said it is exploring plans to split itself into three separate listed companies, causing its share price to surge. 

• Moderna Inc.’s
  MRNA,
  +7.78%
  stock soared after the biotech company and partner Merck & Co.
  MRK,
  -0.59%
  announced positive data from a midstage trial of Moderna’s mRNA-4157 in combination with Merck’s blockbuster cancer drug Keytruda.

• Occidental Petroleum
  OXY,
  +3.01%
  rose after Warren Buffett’s Berkshire Hathaway increased its stake in the company.