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  • Writer's pictureJade Rossback

Rate Cuts Might Be On The Horizon

Economic & Earnings Commentary

On Friday, the last piece of economic data that the investors were keeping an eye open for, the Chicago PMI for December, plummeted to 46.9, from 55.8 in November, marking the largest monthly drop in over two years. The latest reading widely misses the consensus estimate of 50.0 for the period and drops the index back into contraction territory.

This only adds momentum to what the investors have now known for months, that the Fed policy tightening has had the desired effect on the markets and now rate cuts might be on the horizon. Wall Street whimpered off on the last two trading days in 2023 as traders booked profits in what has otherwise been a blockbuster December to cap-off the year.

Further tests of the market's strength will quickly follow suit as companies start to report fourth-quarter results in the next couple of weeks. Market participants are also awaiting the message from the Fed at the conclusion of its first monetary policy meeting of the year slated for late January.

Despite a remarkable turnaround, 2023 had its challenges. The regional banking crisis of March, the political standoff in the halls of the U.S. Congress, oil supply concerns arising from the situation in the Middle-East and recession fears, all took their turns to keep the markets jittery. However, an artificial intelligence induced technology boom and the Fed’s policies finally taking effect to bring the inflation down have ensured that 2023 ends big and on a high note. Investors are currently anticipating rate-cuts as early as March. Even as global macro-economic factors continue to have a bearing, 2024 may already have a solid base to flourish from.

Market News

Wall Street closed slightly lower on Friday, dragged down by real estate, tech and consumer discretionary stocks. The market corrected itself from the rate-cut rally, and investors booked profits to close out the year. All of the three major stock indexes ended in the red.

How Did the Benchmarks Perform?

The Dow Jones Industrial Average (DJI) fell 20.56 points, or 0.1%, to close at 37,689.54. Seventeen components of the 30-stock index ended in negative territory, while 13 ended in positive.

The tech-heavy Nasdaq Composite dropped 83.78 points, or 0.6%, to close at 15,011.35.

The S&P 500 slid 13.52 points, or 0.3%, to close at 4,769.83.

Nine of the 11 broad sectors of the benchmark index closed in the red. The Real Estate Select Sector SPDR (XLRE), the Consumer Discretionary Select Sector SPDR (XLY) and the Communication Services Select Sector SPDR (XLC) declined 1.1%, 0.6% and 0.6%, respectively, while the Consumer Staples Select Sector SPDR (XLP) advanced 0.2%.

The fear-gauge CBOE Volatility Index (VIX) decreased 0.2% to 12.45. A total of 10.6 billion shares were traded on Friday, lower than the last 20-session average of 12.4 billion. Decliners outnumbered advancers on the NYSE by a 2.46-to-1 ratio. On the Nasdaq, declining issues led advancing ones by 2.41-to-1.

Investors Book Profits to Close Out 2023

Over the past few weeks, Wall Street has boomed over Fed rate-cut expectations. According to CME’s FedWatch tool, market participants are not only banking on rate hikes having come to an end but are also predicting a 72.4% likelihood that the central bank will bring down interest rates by 25 bps and an 84.7% likelihood that rate will be cut in March 2024. On Friday, investors took out some profits to close out the year.

Weekly Roundup

All of the three widely followed indexes closed a ninth straight winning week to close off the year. The Dow Jones Industrial Average, the S&P 500 and the tech-heavy Nasdaq Composite jumped 0.8%, 0.3% and 0.1%, respectively. In the last two sessions, markets corrected themselves, and investors booked profits despite the mood being upbeat to pare some gains made through the first three sessions.

Monthly Roundup

The Nasdaq Composite, the Dow Jones Industrial Average and the S&P 500 gained 5.5%, 4.8% and 4.4%, respectively, in December 2023. Investor mood from the December meeting and comments from important Fed officials suggested that the rate-hike regime might have come to an end, and rate cuts could be expected as early as first-quarter 2024.

Quarterly Roundup

The Nasdaq Composite, the Dow Jones Industrial Average and the S&P 500 moved up 13.6%, 12.5% and 11.2%, respectively, in fourth-quarter 2023.

Half-Yearly Roundup

The Dow Jones Industrial Average, the Nasdaq Composite and the S&P 500 gained 9.5%, 8.9% and 7.2%, respectively, in the half-year ended on Dec 31, 2023.

Yearly Roundup

In the year, the Nasdaq, the S&P 500 and Dow advanced 43.4%, 24.2% and 13.7%, respectively. The year was marked by the regional banking crisis in March and an AI-led stock boom. Worries about a supply-side oil crisis stemming from the Israel-Hamas war and fears that restrictive Fed policy could tilt the U.S. economy into recession also dominated the markets. Interest rates came down from decades-high, closer to the Fed’s target rate of 2%.

However, declining interest rates kickstarted a remarkable year-end rally, which shifted into overdrive in December, with the Fed suggesting rate cuts next year. Investors have closed out the year, upbeat about 2024.

*Content provided by Zacks Investment Research. An American company dedicated to the production of independent research and investment-related content. It was founded in 1978 by Len Zacks, based on his insights while pursuing his Ph.D. at MIT.

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