Stocks hit all-time highs a day after Fed cuts rates

Wall Street stocks hit fresh highs on Thursday, after a massive interest rate cut by the Federal Reserve energized a global market rally.

Markets have been hitting records over the past two weeks, recovering from a bout of turmoil in late July and early August. But the Federal Reserve’s announcement on Wednesday that it would cut interest rates by a half-percentage point removed uncertainty about the decision that had loomed over financial markets for months.

The Federal Reserve's rate cut was twice the usual quarter-point adjustment, and the central bank has forecast additional cuts this year.

It often takes a day or two for the market to determine its course after a major event like a Fed decision, and stocks had been wobbly in the immediate aftermath of the rate cut on Wednesday afternoon before optimism took hold overnight.

The S&P 500 rose 1.7% on Thursday, surpassing its last record closing high set in mid-July. The Dow Jones Industrial Average rose 1.3%, also closing at a record high. The Russell 2000 index of smaller companies, which are more sensitive to economic volatility, rose more than 2%.

“This can only be a good thing for stocks,” said Colin Graham, head of multi-asset strategies at Robeco Asset Management.

Lower interest rates are generally good news for stocks, because lower borrowing costs boost corporate profits and increase the value of investors’ holdings. The hope now is that easier financial conditions will spur a fresh wave of gains that has already lifted the S&P 500 by about 20% this year.

Much of this year’s rally was led by technology companies, particularly those at the forefront of developments in artificial intelligence, but investors have been turning away from these investments over the past month. Instead, parts of the market that would benefit from lower prices, such as real estate and consumer discretionary stocks, have taken advantage of the slump.

But investors should also consider that the aggressive cuts by the US Federal Reserve may mean that policymakers are becoming more concerned about the economy, with officials raising their forecasts for future unemployment as the labour market weakens.

On Wednesday, Federal Reserve Chairman Jerome Powell walked this tightrope cautiously.

“The U.S. economy is in a good place, and our decision today is intended to keep it there,” Powell said at a news conference after announcing the interest rate decision.

“They made it clear that this is not an emergency rate cut,” which would have spooked the market, said Quincy Krosby, chief global strategist at retail brokerage LPL Financial.

But there are risks to consider. One is that stock valuations are soaring, and companies will need to deliver strong financial results to support those levels. Companies will start reporting earnings for the third quarter, which ends in September for most, next month.

Geopolitical factors, the US presidential election and a weak labor market could also limit the rally in the coming months.

Analysts noted that the stock market tends to decline in the month leading up to a presidential election, as investors await the winner and with him more clarity on the political backdrop that could affect markets in the future.

For investors, there is typically no difference in returns based on who wins the election, said Joseph Davis, Vanguard’s chief global economist. But he added that any uncertainty in the aftermath of the election could also weigh on markets.

Currently, the Fed’s rate cut has been widely welcomed by global markets. With central banks around the world already cutting interest rates, the Fed’s big move in tandem should ease pressure on their currencies.

The dollar has fallen about 5 percent against a basket of currencies representing its main trading partners since the end of June, as investors began to price in the possibility of a rate cut.

Major stock indexes in Europe and Asia rose on Thursday. The pan-European STOXX 600 posted its best daily performance in more than a month, while Japan’s Nikkei 225 rose more than 2%.

“When the head of the world’s most important central bank announces his commitment to easing monetary conditions, stock markets are sure to love it,” said Steve Sosnick, chief strategist at Interactive Brokers.