Connecting the Dots: Rate Hopes Keep Stocks on Record Track

The new Fed dot-plot maintained three expected cuts this year, which helped propel the SPX to yet another all-time high. Initial jobless claims were below expectations.

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Key Takeaways

  • Fed dot-plot projection maintains outlook for three quarter-point cuts

  • Initial Jobless Claims at 210,000 below expectations, down from last week
  • Philadelphia Fed Index comes in at 3.2 after expectations for below zero

(Thursday market open) U.S. stocks are poised to extend a record run after Federal Reserve leaders injected fresh optimism into long-running hopes that interest rates will eventually be moving lower.

The Federal Open Market Committee (FOMC) concluded a two-day meeting Wednesday with no change in the benchmark funds rate. While no change was expected, investors appeared to be emboldened by the Fed’s updated dot-plot rate projection, which maintained an outlook for three quarter-point cuts this year.

Relatively benign post-meeting comments from Fed Chair Jerome Powell were also well-received, sparking a late rally that propelled the S&P 500® index (SPX) to its 19th record high close of 2024.

Powell’s comments seemed to reassure investors that even if the economy continues producing jobs and retains firm growth, that won’t necessarily forestall rate cuts, said Kevin Gordon, senior investment strategist at Schwab.

The Fed’s message “hasn’t changed regarding inflation, policy, or growth,” Gordon said. “It’s still waiting for data that supports a sustainable move towards their 2% long-term inflation target, and we’re not there quite yet.

“One of the more notable mentions from Powell was the fact that strong job growth, in and of itself, is not a reason to hold off on cutting rates,” Gordon added. “I think that’s a subtle hint at the fact that they are quite optimistic on labor supply and productivity.”

Semiconductor shares look to get out of the gate strong after Micron Technology (MU) reported an unexpected quarterly profit after Wednesday’s close. Micron shares soared around 17% in premarket trading.

Futures based on the SPX were up almost 0.5% shortly before the close of overnight trading and futures based on the Nasdaq-100® (NDX) rose almost 1%. Futures based on the Dow Jones Industrial Average® ($DJI) gained 0.3%.

In other markets, the latest from the Fed sent gold futures (/GC) surging to a record above $2,225 per ounce overnight. Gold prices and interest rates tend to move in opposite directions. Lower rates may reduce the appeal of fixed-income assets such as bonds and prompt investors to seek higher returns elsewhere.

Morning rush

  • The10-year U.S. Treasury yield (TNX) was down about four basis points at 4.23%.
  • The U.S. Dollar Index ($DXY) was up about 0.1% at 103.53.
  • The CBOE Volatility Index® (VIX) was down 0.26 at 12.78.
  • WTI Crude Oil (/CL) was down $0.27 at $81.
  • Bitcoin (/BTC) was up over 4% at $67,295.

What to watch

Thursday delivers a fresh batch of economic numbers for investors to mull over. These include the Conference Board’s December Leading Economic Index® (LEI) for February, scheduled for 10 a.m. ET.

LEI is expected to post a 0.2% decline, according to a consensus forecast from Briefing.com. Such a number would be smaller than January’s 0.4% drop but still mark the 23rd consecutive monthly decline.

Last year, the LEI’s extended slump led the Conference Board to predict a recession in 2024, but the board rescinded that forecast last month due to signs of improvement in several components of the index.

Also Thursday, S&P Global is expected to report its preliminary March U.S. Services and Manufacturing PMI® updates for the manufacturing and services sectors. Existing Home Sales for February are also on tap.

Earlier Thursday, the Labor Department reported Initial Jobless Claims of 210,000 for the week ended March 16, down from 212,000 the previous week. Analysts expected claims to come in around 216,000, according to Briefing.com. Continuing claims rose to 1.807 million from 1.811 million the previous week.

Also Thursday, the Philadelphia Fed Index, a gauge of manufacturing activity, came in at 3.2. While that was down from 5.2 in February, it still stopped expectations for a number below zero, a level that typically conveys contraction.

Stocks in spotlight

Micron Technology, like other semiconductor companies, is benefitting from accelerating bullishness over companies capable of producing chips that can power advanced artificial intelligence systems. Micron reported quarterly earnings per share of $0.42, compared to analysts’ expectations for a loss of about $0.25, and a 58% year-over-year gain in revenue to $5.82 billion.

“We believe Micron is one of the biggest beneficiaries in the semiconductor industry of the multiyear opportunity enabled by AI,” Micron CEO Sanjay Mehrotra said in a statement.

Earlier this week, Nvidia (NVDA) CEO Jensen Huang announced a new generation of AI chips at his company’s GTC conference. Nvidia shares are up 82% year to date, tops among 30 companies in the PHLX Semiconductor Index (SOX). Coherent (COHR) ranks second with a 38% gain.

Among other companies, shares of KB Homes (KBH) also rose in premarket trading after the homebuilder’s quarterly results late Wednesday surpassed expectations. Also, The Wall Street Journal reported that airline CEOs are seeking a meeting with Boeing (BA) directors to address production problems.

Thursday’s earnings calendar includes Nike (NKE), whose results are expected after the market closes, as well as Accenture (ACN), Darden Restaurants (DRI), FedEx (FDX), lululemon athletica (LULU), and Shoe Carnival (SCVL).

Nike shareholders surely hope to avoid a repeat of the previous quarterly earnings announcement in December, when the company’s scaled-back sales forecast helped send the stock tumbling 12%. The shares have remained under pressure, down over 7% so far this year, amid concern over demand for the company’s athletic gear. Nike is expected to earn about $0.69 per share, based on a consensus forecast posted on Nasdaq.

Thursday also marks the public-market debut of online forum host Reddit (RDDT), which on Wednesday priced its initial public offering (IPO) at $34 a share, the high end of the expected range. The offering raised $519 million and values the company at nearly $6.5 billion, according to a statement.

Wednesday in review:

After trading mixed much of the morning, U.S. stocks rallied to another round of record highs after the FOMC meeting. The S&P 500 index added 46.11 points (0.9%) to 5,224.62; the Dow Jones Industrial Average gained 401.37 points (1%) to 39,512.13, and the Nasdaq Composite® rose 202.62 points (1.3%) to 16,369.41. The small-cap Russell 2000® Index (RUT) outpaced its large-cap counterparts with a jump of nearly 2%.

Eye on the Fed

Early today, futures trading pegged nearly 90% the FOMC will keep rates unchanged following its April 30 to May 1 meeting, according to the CME FedWatch Tool. Odds for a quarter-point rate cut following the FOMC meeting in June have jumped to over 67% from 55% a week ago, based on the FedWatch tool.

Powell’s post-FOMC remarks struck some analysts as dovish leaning, even as the Fed leader continued to express caution over the prospect of cutting rates.

“We believe our that policy rate is likely at its peak for this tightening cycle and that if the economy evolves broadly as expected, it will likely be appropriate to begin dialing back policy restraint at some point this year,” Powell told reporters.

“The economic outlook is uncertain, however, and we remain highly attentive to inflation risks,” Powell said. “We are prepared to maintain the current target range for the federal funds rate for longer if appropriate.”

CHART OF THE DAY: FUEL FOR THOUGHT: RBOB gasoline futures (/RB—candlesticks) have surged almost 40% from a mid-December low (red arrow) and earlier this week touched a six-month high just under $2.77 per gallon (yellow arrow). Fuel prices are being pulled higher by a rally in crude oil, forcing motorists to pay more at the pump and contributing to an uptick in inflation early this year. But some relief may be in sight. Read more below. Data source: CME Group. Chart source: thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results.

Thinking cap

Ideas to mull as you trade or invest


Oil prices still lofty: WTI Crude Oil futures (/CL) sank over 1.5% Wednesday despite another larger-than-expected weekly drop in U.S. inventories reported by the Energy Information Administration (EIA). Crude prices are still trading near the highest levels since early November, after topping $84 per barrel earlier this week. Oil prices are up about 14% so far this year behind OPEC production cuts and concern over supply disruptions following Ukrainian attacks on Russian oil refineries. Higher oil prices have contributed to a pickup in inflation but also benefitted big producers such as Exxon Mobil (XOM), whose shares are up 13% this year, and helped make energy one of the market’s top-performing sectors.

Bucking up at the pump: U.S. pump gasoline currently averages about $3.52 per gallon, up 7.3% from a month ago and up 2.1% from a year ago, according to AAA. Retail gasoline prices typically follow the crude market with a lag of a few weeks, meaning motorists may be paying even more in the near future. But with summer driving season a little over two months away, some relief may be in sight. June WTI crude futures are trading about $1 lower than the nearby contract, and prices for subsequent months recede steadily under $80 through the end of the year. That suggests oil traders expect near-term supply constraints to eventually dissipate.

Deal me in: Merger and acquisition activity appears to be perking up this year after a relatively sleepy 2023, at least based on the dollars changing hands. During February, M&A deals involving U.S. companies reached a combined value of $187.2 billion, up 14% from January and the third consecutive monthly increase, according to FactSet. February was the second-highest monthly total over the past year, trailing only last October’s $222.9 billion, and was fueled by a handful of large deals, including Capital One Financial’s (COF) planned acquisition of Discover Financial Services (DFS) for $35 billion (the number of announced deals in February actually fell 19% from January to 1,045).


Calendar

March 22: No major earnings or economic data expected.

March 25: February New Home Sales.

March 26: Durable Goods orders, S&P CoreLogic Case-Shiller Home Price Index.

March 27: EIA Weekly Petroleum Status Report.

March 28: Weekly initial jobless claims, third estimate for fourth quarter GDP, University of Michigan Index of Consumer Sentiment final March estimate. 

Print

Key Takeaways

  • Fed dot-plot projection maintains outlook for three quarter-point cuts

  • Initial Jobless Claims at 210,000 below expectations, down from last week
  • Philadelphia Fed Index comes in at 3.2 after expectations for below zero

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