Financial Markets New York

An entrance to the New York Stock Exchange is seen on May 8 in New York. Peter Morgan/Associated Press

The stock market headed to fresh all-time highs Thursday, with the Dow Jones Industrial Average hitting the historic 40,000 mark to extend an advance that’s been fueled by bets the Federal Reserve will be able to cut rates this year.

The oldest of Wall Street’s three main stock indexes has been boosted by the prospect of a resilient U.S. economy, ebbing inflation and robust corporate earnings. It took 872 trading sessions through Wednesday for the Dow to set its latest 10,000-point milestone – or a gain of 33% – with the index recouping all of its losses from the Fed’s aggressive rate hikes over the past two years, data compiled by Bloomberg show.

“Breaking the 40,000 barrier is a big psychological boost for the bulls, as round numbers hold special significance in people’s hearts and minds,” said Chris Zaccarelli, chief investment officer for Independent Advisor Alliance.

The S&P 500 hovered near 5,320. Walmart climbed on a bullish outlook as the big-box retailer attracts consumers looking for essentials and discounts. GameStop and AMC tumbled as the meme-stock frenzy faded.

“All traders wanted the past year was for the Fed to signal that interest rates have peaked,” said Jamie Cox, managing partner at Harris Financial Group. “With rate cuts still expected later this year, that’s propelled the latest surge in stocks as the reality sets in that profits for companies beyond tech are also strong, helping to broaden out the rally.”

To John Lynch at Comerica Wealth Management, the Dow hitting 40,000 is a testament to the powers of capital formation, innovation, profit growth,and economic resilience.

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“The recent technical momentum and fundamental strengths, including earnings and interest rates, suggest further near-term gains,” he said. “Investors should be careful not to sprint on the victory lap, though, as a combination of geopolitics, valuation and market interest rates may lead to a sudden directional shift.”

While the index has evolved over time since it was first launched in 1896 by American journalist Charles Dow, it’s still a much narrower equities gauge than the S&P 500 or Nasdaq, both of which have soared back to records.

A key difference between the Dow and the broader S&P 500 is the methods used to weight their constituent stocks. The Dow is price-weighted, meaning that changes in the highest-priced stocks have greater impact on the index level than price changes in the lower-priced stocks. The S&P 500, however, is market-cap-weighted.

“40,000 is a great milestone, but (at the) end of the day, there isn’t much difference between 39,999 and 40K,” said Ryan Detrick at Carson Group. “Still, this is a great reminder of how far we’ve come. Think about how many people were talking about recessions and bear markets all of last year. Now, we are once again back to new highs. Investors who were patient and ignored all the scary headlines were once again rewarded, just as they have been throughout history.”

Can stocks keep going?

“We think they can and more strength in ’24 is likely,” Detrick said. “Earnings continue to surprise to the upside, balance sheets for corporate America are in great shape, while the consumer might have some cracks but is still strong thanks to a very healthy employment backdrop. Then consider lower rates are likely coming thanks to inflation that should drastically improve the second half of this year.”

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The stock market saw a nice new breakout to all-time highs this week and another upside follow-though – after a likely short-term “breather” – will be keep the bulls in charge, according to Matt Maley at Miller Tabak & Co.

“There is a lot of leeway for the stock market if we do see a short-term pullback soon,” he noted. “Put another way, the bulls are still fully in charge right now, and so it will take a significant reversal to stem the tide of the upside momentum.”

A handful of central bank officials were on schedule to talk Thursday, with Fed Bank of New York President John Williams telling Reuters that the latest U.S. inflation data confirm price pressures are gradually easing.

Jamie Dimon said he’s still more worried about inflation than markets appear to be. The JPMorgan Chase & Co. CEO said significant price pressures are still influencing the U.S. economy and may mean interest rates will be higher for longer than many investors are expecting. Dimon cited costs linked to the green economy, re-militarization, infrastructure spending, trade disputes and large fiscal deficits.

“There are a lot of inflationary forces in front of us,” Dimon said in an interview Thursday on Bloomberg Television. “The underlying inflation may not go away the way people expect it to.”

Richard Tang, an executive at Chris Rokos’ hedge fund, says it’s unlikely the Fed will loosen monetary policy this year.

The path of inflation has become very difficult to forecast, particularly in the context of a presidential election later this year, said Tang, head of global markets at Rokos Capital Management. The market is pricing in two interest rate cuts this year.

“It’s unlikely that the Fed will be able to cut this year,” Tang said in a Bloomberg Television interview Thursday. “We have a very significant presidential election coming up, and that does have policy implications, so once we get through all of this, it’s pretty much a 50-50 bet whether it’s an ease or a hike.”


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