Markets Continue To Shine Amid High Interest Rates
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Another positive day for the major indices in the stock market today, with the Dow closed just barely eking higher than 38K — 38001.94 — for the first time ever. The S&P 500 also notched another all-time high — 4850 — while the Nasdaq has reached a fresh 52-week high, 15,360. Yet it was the small-cap Russell 2000 that raced ahead of the pack this morning and stayed there, closing near session highs: +2.01%. None of the indices spent one second in negative territory today.
Considering we were at near-term lows as recently as the week before Halloween, this has been a most impressive move higher — even with a couple of notable dips in the past month or so. The question is: where are these markets headed from here? Those cooler trading sessions appeared that market participants were beginning to subtract from their earlier perceived six interest rate cuts from the Fed, starting this March. While that number of cuts is certainly still possible — there are eight meetings overall this year — it is considered less likely than many analysts were projecting just a few weeks ago.
Much will have to do with how the Fed’s preferred metric of economic performance — Personal Consumption Expenditures (PCE), due out Friday morning for the month of December — delivers. Core PCE month over month is actually expected to have ticked up last month, while core (minus volatile food and energy costs) PCE year over year looks to simmer down 20 basis points (bps) to an even +3.0%. Headline PCE year over year was +2.6% a month ago — will this continue to ratchet down toward the Fed’s optimum inflation level of +2%?
Even though the Fed considers PCE figures highly important, they’re not the only economic metrics hitting the tape this week. Both New and Pending Home Sales are expected to climb month over month, as something of a pull-forward from spring levels is evident as mortgage rates currently reside in “reasonable” territory. This also shows how pent-up demand in the housing space is manifesting itself — but it’s also a sign that the economy is plenty strong to withstand current high-interest rates, meaning it lessens the likelihood of a move lower from the Fed.
Preliminary Q4 Gross Domestic Product (GDP) will also be out on Thursday morning, expected to come in at a still-respectable +2.0% from Q3’s robust +4.9%. This again would portend a reluctance from the Fed to make a move toward lowering interest rates while the economy continues to demonstrate strength. So if we’ve removed expectations for six cuts this year, perhaps we’d like to consider closer to two or three, instead? Data-dependent, of course.
After today’s close, United Airlines (UAL) outperformed expectations on both the top and bottom lines in its Q4 report. Earnings of $2.00 per share easily surpassed the $1.61 in the Zacks consensus (though still lower than the $2.46 per share posted in the year-ago quarter) on revenues of $13.62 billion — ahead of the $13.55 billion analysts had been expecting. That said, earnings are expected to head deeper into negative territory, -$0.35 to -$0.85 per share, down from -$0.11 initially projected. Much will have to do with the fate of the currently grounded 737 MAX fleet, which is estimated, at current levels, to be cost per available seat mile (CASM) of 3%.
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Let's hope the good news continues.