U.S. stocks closed with a mixed performance on Friday as investors prepared for the Christmas holiday weekend. After digesting cooler-than-expected inflation data, the market was swayed toward the expectation of Federal Reserve interest rate cuts in the new year. However, as the afternoon progressed, trading became less decisive, with all three indexes displaying a lack of momentum. This could be attributed to traders pulling back ahead of the long weekend, as well as heightened geopolitical risks.
Despite the mixed closing, the small-cap stocks, represented by the Russell 2000, outperformed the broader market, ending up 0.8%. It was also notable that all three indexes achieved their eighth consecutive weekly gains, which marks the longest winning streak for the S&P 500 since late 2017. This streak of gains was also significant for the Nasdaq and the Dow, as it had not been seen since the start of 2019. With the S&P 500 now within 1% of its record close in January 2022, closing above this level would confirm that the benchmark index has been in a bull market since bottoming out in October 2022.
Considering the year-to-date basis, the performance of the fourth quarter has been extraordinary. Michael Green, the chief strategist at Simplify Asset Management in New York, highlighted the impressive run of small-cap stocks, stating that “The Russell 2000 has gone from being down on the year as of August to now being up 15.6% for the year.” This demonstrates the triumph of what can be described as an “everything” rally, where most sectors have experienced upward momentum.
A significant release of economic data occurred on the last trading day before the long weekend. The Commerce Department’s Personal Consumption Expenditures (PCE) report revealed that inflation continues its downward trajectory toward the Federal Reserve’s target of 2% annually. In addition, a separate report showed that core capital goods’ new orders exceeded analysts’ expectations, providing optimism for U.S. corporate spending plans. Both of these data points reinforce the conviction that the central bank will likely initiate interest rate cuts as early as March 2024. It also suggests that the Fed may be able to rein in inflation without triggering a recession, aiming for a “soft landing.”
Gary Ghriskey, senior portfolio strategist at Ingalls & Snyder in New York, highlighted the PCE report’s dovishness and its potential impact on interest rates. According to Ghriskey, “The topline number showed deflation for the month. It was very positive and perhaps a step toward lowering rates.” However, he cautioned that the expectation for rate cuts in March may be overly optimistic, emphasizing that the economy is currently strong and does not necessarily require lower rates.
The market is currently pricing in a 74.1% likelihood of a 25 basis point rate cut by the Federal Reserve in March, according to CME’s FedWatch tool. Despite this expectation, the market closed with the Dow Jones Industrial Average down 0.05% and the S&P 500 up 0.17%. The Nasdaq Composite also registered a slight gain of 0.19%.
Among the major sectors, consumer discretionary was the only loser, while consumer staples enjoyed the largest percentage gain. Notable stock movements included Nike’s significant tumble of 11.8% after downgrading its annual sales forecast due to cautious consumer spending. Additionally, Foot Locker and Dick’s Sporting Goods experienced declines of 2.7% and 3.9%, respectively. However, Karuna Therapeutics saw a tremendous surge of 47.7% following Bristol Myers Squib’s agreement to acquire the drugmaker for $14 billion in cash.
As the Christmas holiday approaches, U.S. stocks closed with a mixed performance, driven by the anticipation of Federal Reserve interest rate cuts in the new year. Despite the lack of decisive momentum in the market, small-cap stocks continued to outperform and achieve remarkable gains. Furthermore, economic data revealed that inflation is nearing the Federal Reserve’s target, fueling expectations of rate cuts while avoiding a recession. Moving forward, market participants will closely monitor the strength of the economy and the Federal Reserve’s actions to determine the trajectory of future market performance.