After fluctuating within a narrow range for nearly a month, the S&P 500 index hit a new closing high for the first time in more than two years on Friday (19th).
The S&P 500 index closed at 4839.81 points, surpassing the historic closing record of 4796.56 points set on January 3, 2022. According to FactSet data, the index rose to an intraday high of 4842.07 points, surpassing the record of intraday of 4818.62 points set on January 4, 2022.
US stocks experienced a bumpy start to 2024. Analysts attributed this to another rise in US Treasury bond yields and uncertainty over the Federal Reserve’s March interest rate cut.
However, even if the stock market cannot benefit from the Federal Reserve, it may still receive support from continued growth in the US economy.
The Federal Reserve will start cutting interest rates in 2024, which is the main reason for the rebound in US stocks at the end of last year. But later, Fed Governors Christopher Waller and Raphael Bostic said in speeches that the Fed was in no rush to cut interest rates and might not even cut interest rates.
Last week’s economic data largely supported this view. US retail sales increased 0.6% in December from the previous quarter, the largest increase since September 2023; the number of people who applied for unemployment benefits for the first time in December fell by 18,000 to 187,000, the lowest level in 16 months.
In addition, the University of Michigan consumer confidence index rose 9.1 points to 78.8 in January, the largest increase since 2005. Inflation expectations fell to the lowest level in three years, and expectations for an improvement in financial conditions strengthened. As of last week, the chance of a rate cut in March, which had excited investors, had fallen from 79% to 52%.
“Barron’s” analysis pointed out that if the factors driving the rise in US stocks are the same as at the end of last year, then none of this makes sense. The gains in US stocks suggest that something is starting to change, at least on the surface: The stock market is starting to price in expectations that the US economy will continue to grow and that interest rates may have cut them less often.
Perhaps investors should have anticipated this. Christopher Harvey, head of equity strategy at Wells Fargo Securities, pointed out that at the end of 2023, the difference between an investment-grade bond and similar maturity US Treasury bond yields was just 0.99 percentage points, marking the seventh time since 1998 that it had . has been less than 1 percentage point at the start of the new year.
In the last seven times, the average GDP growth rate of the United States was 2.2%, and the only year of decline was 2020, when the new crown epidemic caused complete economic stagnation. In the recession years, the gap between investment grade bond yields and Treasury yields of similar maturity was more than 1.98 percentage points at the start of the new year. Harvey believes this means that the US GDP growth rate will be above 2% this year, and the number of interest rate cuts will be much less than expected.
Changes in expectations regarding interest rate cuts may have had an impact on the stock market. This was the case at the end of 2023, when the forward price-to-earnings ratio of the S&P 500 index in the next 12 months rose from 17.48 times to 19.62 times at the end of the year; on the other hand, more high interest rates can lead to lower stock market valuations.
Worse, optimism about the economy may ultimately be unfounded if the Fed delays cutting interest rates and pushes the economy into recession.
Roth MKM strategist Michael Darda said: “If the economy continues to grow, a higher interest rate structure will pose a threat to risk asset valuations; and if corporate revenue growth weakens this year, a declining profit environment will become is a threat. The latter is still expected to happen.”
“Barron’s Weekly” remains optimistic that if the economy is as strong as it appears, it will provide momentum for the stock market to continue higher; if stronger growth translates into stronger profits, it will benefit small and value stocks.
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