tl;dr
U.S. stocks rose after the Federal Reserve cut its key interest rate by 25 basis points to 4.50%-4.75%. The S&P 500 ended 0.7% at 5,973.10, the Nasdaq Composite 1.5%, and the Dow shed less than 1 point. Economic activity is expanding, but inflation remains somewhat elevated. Treasury yields droppe...
U.S. stocks finished higher Thursday after the Federal Reserve cut its key interest rate, as expected, extending record highs logged after the Republican Party won back the White House and the U.S. Senate. The Federal Open Market Committee unanimously cut the fed funds rate by 25 basis points to 4.50%-4.75%. It was the first policy decision since Tuesday's U.S. elections ended and Donald Trump won the presidential race over Vice President Kamala Harris. "The election will have no effects on our policy decisions," Federal Reserve Chairman Jerome Powell said, adding that policymakers will have plenty of data to sort through before December's meeting.
The S&P 500 (SP500) ended 0.7% at 5,973.10. The Nasdaq Composite (COMP:IND) 1.5%, while the Dow (DJI) shed less than 1 point. The blue-chip gauge on Wednesday finished with a massive 3% surge. "The party continues - this time, fueled by the Fed’s decision to cut rates and the fact that it does not rule out cutting again in December," Leo Nelissen, part of investing group iREIT on Alpha, told Seeking Alpha. "This keeps the rally alive, as the bull case consisting of falling inflation, consistent GDP growth, and cheaper debt continues to support risk assets."
Economic activity is expanding at a solid pace and "inflation has made progress toward the Committee's 2 percent objective but remains somewhat elevated," the FOMC said in its statement. In the bond market, Treasury yields remained lower after the Fed rate cut, as well as big jumps on Wednesday as prices slid. The 10-year yield (US10Y) fell 10 basis points to 4.33%. The 2-year yield (US2Y) dropped 7 basis to 4.20%.
Eight of the S&P 500's (SP500) 11 sectors were in the green, led by Communications Services 1.9%. Financials, which surged on Wednesday, lost the most -1.6%. "The S&P remains a 'coiled spring' of upside to 6,200," with further rate cuts coming while corporate earnings and the economy "remain resilient,' Rich Ross, head of technical analysis at Evercore ISI, said in a note.
Key equity indexes soared on Wednesday, as did other risk assets including small-cap stocks (RTY), and bitcoin (BTC-USD). The Dow (DJI) climbed 1,508 points on Wednesday, the largest advance since April 2020, according to Carson Group. "In light of the election, this rally also puts pressure on the incoming administration to keep it this way, as the market is trading at almost 24x forward earnings, which requires consistent double-digit S&P 500 EPS growth," Nelissen said. "The air is getting thinner. However, as long as inflation refrains from re-accelerating, the Fed should be able to fight potential weakness with lower rates," Nelissen said.
MUFG expects the Fed in December to deliver another quarter-point rate cut, then "rethink" its path forward. Macrowise, the "K-shaped economy is at risk of further deterioration in the transition to a new government, while inflation takes a backseat, for now," George Goncalves, head of U.S. macro strategy at MUFG, said in a pre-Fed decision note. "Election uncertainty fading helps, but it is too soon to say the coast is clear and that labor hoarding pre-event doesn’t end up as layoffs," Goncalves said. Earlier Thursday, initial jobless claims rose slightly less than expected in the past week. Also, nonfarm productivity rose less than expected, while labor costs climbed more in Q3.
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