Dow Jones, S&P 500 hit record highs but remain on the edge ahead of Fed rate decision
The US markets treaded water on Wall Street on Tuesday as benchmark indices managed to end little changed ahead of the all important US Federal Reserve interest rate decision later tonight.
The Dow Jones hit a record high but ended with minor losses, while the S&P 500 too hit a record high but closed just above the flat line. The Nasdaq Composite ended with gains of 0.2%.
Both Dow and the S&P 500 have hit record highs in a month that is historically known for being the worst month in the calendar year over the last 10 years, averaging a monthly loss of 1.3%.
In the last piece of economic data before the Fed decision, retail sales in August rose 0.1%, contrary to economists’ expectations of a 0.2% fall. Excluding autos, that number still increased by 0.1% but missed the 0.2% forecast.
Wall Street is on standby for the Fed’s rate cut, that will be announced Wednesday afternoon local time and closer to midnight Indian Standard Time. The Fed had begun raising rates in March 2022.
Traders are now pricing in a 63% chance of the Fed easing rates by 50 basis points, according to the CME Group’s FedWatch Tool. That number is lower than Monday’s 67% but higher than Friday’s 47%.
While some investors believe that a steeper rate cut may spark concerns about the health of the economy, a former New York Fed President believes that the Fed should cut by 50 basis points. You can read more on that here.
“It’s rare under the Powell Fed for markets to be this ‘up in the air’ on what exactly the Fed will do with just one day to go before the decision,” according to Bespoke Investment Group strategists. “Although maybe the Fed is happy with the market being 100% sure that we’ll at least get a cut.”
A survey conducted by 22V Research showed investors who expect a 25 basis-point reduction are split on whether that cut would deliver a “risk-on” or “risk-off” reaction. Meantime, those betting on 50 basis points think a smaller Fed move would be “risk-off.”
While the market has typically done well on Fed Days when rates have been cut, performance in the week after the first rate cut of a new easing cycle has been pretty weak, according to Bespoke.
The S&P 500 has averaged a drop of 0.56% from the close on the day before the first rate cut through one week later, while eight of 10 sectors have averaged declines as well. Financials and health care have seen the most weakness in the week after the first rate cut, while tech and communication services have bucked the trend and averaged gains.
(With Inputs From Agencies.)