Stocks surged Friday and the Dow closed at its first record high of the year after Federal Reserve Chair Jerome Powell signaled interest rate cuts could be on the way.
The Dow rose 846 points, or 1.89%, to close at an all-time high of 45,631.74. It’s the Dow’s first closing record high since December 4.
The broader S&P 500 gained 1.52% and the tech-heavy Nasdaq Composite gained 1.88%. The S&P posted its best day since May and snapped a five-day losing streak. The Dow also had its best day since May.
Investors across the globe were attuned to Powell’s speech at an annual central banking forum in Jackson Hole, Wyoming. Markets cheered his remarks that a shift in interest rate policy may be needed — though any rate cut would be in response to slowing growth in the labor market.
“The baseline outlook and the shifting balance of risks may warrant adjusting our policy stance,” Powell said.
“Downside risks to employment are rising,” he said. “And if those risks materialize, they can do so quickly in the form of sharply higher layoffs and rising unemployment.”
Wall Street had expected Powell would be cautious about hinting at rate cuts, so the signal that the central bank might consider lowering rates was enough for stocks to take off on a rally.
“Investors are enthusiastic that the Fed will likely resume its easing cycle next month,” José Torres, senior economist at Interactive Brokers, said. “Lighter rates are bolstering trader sentiment and widening the path for a broader rally into year-end.”
The Fed has held its benchmark interest steady since December. A Fed rate cut would lower savings and borrowing rates, boosting spending and investing while stimulating business activity, creating a sustained tailwind for the stock market.
A rate cut can also lower bond yields, making higher-yielding assets like stocks more appealing for investors.
Powell took a more “dovish” tone than markets were expecting, according to Krishna Guha, vice chairman at Evercore ISI. A dovish tone means Powell indicated he’s concerned about the labor market and growth and potentially ready to lower interest rates to stimulate economic activity.
“Powell’s dovish Jackson Hole comments suggest the Federal Reserve is ready to cut interest rates in September, which is just what investors were hoping to hear, given the recent slowdown in the labor market,” David Laut, chief investment officer at Abound Financial, said in an email.
“The stock market tends to favor lower interest rates and since Powell hinted at the likely prospect of a September cut, we expect the market’s bullish trend to continue over the short term,” Laut said.
Powell discussed concerns about inflation, which still runs above the Fed’s target of 2%, but leaned into acknowledging a cut might be needed to support the labor market.
“Of course, we cannot take the stability of inflation expectations for granted,” he said. “Come what may, we will not allow a one-time increase in the price level to become an ongoing inflation problem.”
“Powell threaded the needle perfectly — dovish enough to keep September cuts alive but disciplined enough to maintain Fed credibility amid political pressures,” Jayson Bronchetti, CIO at Lincoln Financial, said in an email. “Investors saw the markets rip higher as Powell’s commencement style address acknowledged that while inflation progress has been made, the labor market is cooling faster than expected.”
Wall Street had been divided on whether Powell would hint at rate cuts or note that uncertainty about inflation gives credence to a wait-and-see approach.
Bonds rallied sharply Friday as traders digested Powell’s remarks that cuts are likely on the way.
“Stocks and bonds knee-jerked to a very happy place when Chair Powell opened the door to a September rate cut,” Carol Schleif, chief market strategist at BMO Private Wealth, said in an email.
The 2-year, 10-year and 30-year Treasury yields all fell as investors snapped up bonds to lock in high rates ahead of a potential Fed rate cut in September.
Yields and prices trade in opposite directions. If the Fed is expected to cut rates, investors will snap up bonds to secure the current high rates, pushing yields lower.
“Fed Chair Powell has clearly opened the door for a 0.25% rate cut at the September FOMC meeting, largely predicated on the recent cooling in the labor market,” Chip Hughey, managing director for fixed income at Truist Advisory Services, said in an email.
Traders are now pricing in an 83% chance the Fed cuts rates in September, up from a 75% chance before Powell began his remarks.
Meanwhile, Wall Street’s fear gauge, the CBOE Volatility Index, sank 13.8%, signaling relative calm in markets.
The US dollar index, which measures the dollar’s strength against six major foreign currencies, fell 0.9% on expectations for rate cuts and signs of slowing economic growth.
The Dow on Friday clinched its first closing record high of the year. It’s been 177 trading days since the Dow’s last closing record in December, according to Howard Silverblatt, senior index analyst at S&P Dow Jones Indices.
It marks the completion of a remarkable recovery for the blue-chip index. The Dow in April had dropped as much as 16% from its previous peak in December before clawing back those losses.
The Dow now joins the broader S&P 500 and Nasdaq in notching a record high this year. The S&P and Nasdaq hit record highs on June 27 and have since extended their gains into record territory.
“It indicates a broadening out in this rally,” Rob Haworth, senior investment strategy director at US Bank Asset Management Group, said. “I think it’s a constructive sign for the economy overall that you’re starting to see some of the left-behind sectors get into a positive trend.”
While uncertainty looms over the weakening job market, stock market investors for now are embracing enthusiasm about robust corporate earnings and the prospect of a potential Fed rate-cutting cycle.
