Dow Jones, S&P 500 hit record highs but end lower despite 50 bps cut from the Fed
Benchmark indices on Wall Street ended lower on Wednesday despite the US Federal Reserve delivering a much anticipated 50 basis points rate cut.
The Dow Jones and S&P 500 did hit record highs post the policy announcement with the Dow surging as much as 375 points, but the surge was immediately sold into and by closing, the index ended 100 points lower. The S&P 500 also fell 0.3%, as did the Nasdaq.
While the Fed did lower the overnight lending rate to 4.75% to 5% from 5.25% to 5.5% earlier, Chair Jerome Powell cautioned against assuming that these giant-sized rate cuts would continue. While that may not necessarily be bad considering that aggressive easing is usually associated with economic stress, the “buy the rumour, sell the news” phenomenon did come into play on Wednesday.
Powell did assuage concerns that the 50 bps cut is not due to any kind of economic stress but because the downside risks to inflation have increased a lot more. “I don’t see anything in the economy right now that suggests that the likelihood … of a downturn is elevated,” the Fed Chair said.
The selling pressure may have emerged considering the run-up that was already seen in the lead-up to the Fed announcement. The S&P 500 is up nearly 18% so far this year.
“After a rally ahead of today’s Fed announcement, it wouldn’t be unreasonable for the market to pull back a bit,” said Bret Kenwell at eToro. “However, the long-term outlook remains promising. So long as the economy holds up and inflation doesn’t roar back to life, lower rates and strong earnings growth can continue to drive stocks higher over the long term.”
To Ian Lyngen and Vail Hartman at BMO Capital Markets, Powell’s press conference was consistent with the magnitude of the cut and effectively communicated that officials aren’t particularly worried about any aspect of the real economy at the moment.
“It’s impressive that in the classic, ‘buy-the-rumor, sell-the-fact’ dynamic, the ‘fact’ of a 50 basis-point cut was still met by selling,” they said, referring to the reversal in bonds. “Positions are being squared and the market is moving back into the mode of trading the incoming economic data with an eye to the potential influence from the presidential race.”
Treasury 10-year yields advanced six basis points to 3.7%. The dollar rose.
The market is now pricing in another 70 basis points worth of rate reductions at the Fed’s two remaining meetings this year, reflecting a far more aggressive stance than policymakers. Officials on Wednesday forecast just a half-point of further easing in 2024. They penciled in an additional percentage point of cuts in 2025, according to the median forecast.
(With Inputs From Agencies.)