Stocks rallied last week ahead of the Federal Reserve’s policy meeting coming up this week. The Dow Jones Industrial Average advanced 2.6% to 41,394 – the Standard & Poor’s 500 Index gained 4% to 5,626 – the NASDAQ Composite jumped an eye-popping 6% to 17,684. For the S&P 500 and the NASDAQ Composite, it was their best weekly performance of the year.
Investors are enthusiastic about the long-awaited interest rate cut by the Federal Reserve, which is virtually certain to come this week when the Fed concludes its policy meeting on Wednesday. While the financial markets are certain the Fed will cut interest rates this week, the size of the rate cut has now become a “coin-flip” type of situation (after some sharp fluctuations during the week).
Investors are now split evenly as to whether the Fed will cut rates ¼ percentage point or opt for a bigger ½ percentage point cut. According to CME FedWatch as the trading week ended on Friday, probabilities indicated about an equal chance of a ¼ or ½ point cut. Previously the probability indicated more likelihood for the smaller ¼ point cut. More market discussion about a ½ point cut has been surfacing and former Fed President Bill Dudley commented late Thursday that there is a strong case for ½ point cut.
The recently increased chance of a ½ percentage point rate cut is benefitting small cap stocks, with the Russell 2000 Index significantly outperforming the major averages on Friday and posting a solid gain of 4.4% last week. Smaller companies are more sensitive to changes in interest rates as they typically borrow more money and rely more on floating rate loans.
The stock market likes lower interest rates and investors have been waiting for this upcoming cut and shift in monetary policy for a long time. When something is widely expected, however, the actual occurrence of that even often results in little market movement. As discussed above, an interest rate cut this week it totally expected and has been priced into the market. What the market will be watching for more is Federal Reserve commentary on the pace and quantity of future interest rate cuts, the reasoning behind why the Fed cut either the ¼ or the ½ percentage point, and their outlook on the economy and inflation.
Getting a fresh update on the rate cut probabilities from a few moments ago, there is now a 39% chance for a ¼ point cut and a 61% chance for a ½ point cut – according to CME FedWatch.
As always, feel free to reach out to us with any questions or if you would like to schedule a meeting.
All the best – Southport Station Financial Management, LLC