Dow up 200 points, S&P 500 eyes record as interest rate-cut hopes underpin sentiment

What’s driving markets

Investors are breaking out the eggnog.

While the Dow has already been turning out record closes of late, the S&P 500 index is now less than 1% away from its own record close. The stock market benchmark closed at a record 4796.56 on Jan. 3, 2022.

Traders remained energized by the prospect of the Federal Reserve starting to cut interest rates by the spring of next year. More evidence of a sturdy economy is also providing a tailwind.

Richmond Fed President added some more holiday cheer with remarks Tuesday morning that there’s “good progress” in the fight against inflation.

When it came to any interest rate cut details, Barkin said it was still too soon. If inflation keeps slowing like it is now, the central bank “would of course respond appropriately” by cutting interest rates, he said.

Some Fed officials in recent days pushed back against the market’s hopes for lower borrowing costs as early as March, but equity investors seem to have shrugged off those comments, for now.

Investors will have more Fed official comments to parse when Atlanta Fed President Raphael Bostic speaks at 12:30 p.m. Eastern.

Read also: One of Wall Street’s biggest bears says the Fed is giving investors a good reason to be bullish in 2024

Investors also got another look at the housing market at a time when mortgage rates are already starting to turn lower.

November housing starts increased 14.8% after a revised 0.2% gain for October. That’s the best reading since May. Meanwhile, building permits fell 2.5% in November.

Since last month, there’s been two bullish trading themes at play, said Callie Cox, U.S. investment analyst at eToro. It’s either the rate-cut trade powering stocks higher, or its the trade on the bet of a continuing strong economy.

“Today is a strong economy trade” Cox told MarketWatch on Tuesday morning, noting the strong showings for stocks in materials and real estate. Of course, Barkin’s comments, and the the rate cut trade, are playing into the momentum too, she added. It’s just that the Tuesday trading dynamic show the strong economy trade setting the tone, Cox noted.

“This is the kind of rally you want to see, a rally with broad paticipation,” she said. “Cyclical stocks are taking the baton of leadership from more quality risk sectors and that could power another move higher.”

But will the S&P get back to its record? The chances look good but the timing is the question, as Cox sees it right now.

Cox sounds hopeful, as do an array of global fund managers. In Bank of America’s latest look at fund manager sentiment, managers have their rosiest view of the stock market since January 2022 That’s right around the S&P 500’s record close, which is now in sight.

Investors have monetary policy news to trade off beyond the United States.

The Bank of Japan on Tuesday reminded traders that an important spigot of cheap money remains open. The BOJ left its main interest rate at minus 0.1%, and in the accompanying news conference, Gov. Kazuo Ueda provided little evidence he was minded to exit from the central bank’s ultraloose monetary policy soon, despite inflation running above its 2% target for 19 consecutive months.

The Japanese yen
USDJPY,
+0.56%
fell 1.2% and the Nikkei 225 stock index
JP:NIK
rose 1.4% as 10-year government bond yields
BX:TMBMKJP-10Y
fell 3.6 basis points to 0.634%, the lowest in nearly four months.

“Whenever central banks take positions that the market thinks are unsustainable, it’s always the currencies that play the role of the canary in the coal mine. No surprise then to see the Yen weakening by around 1% against every major currency overnight as investors vote with their feet,” said Steve Clayton, head of equity funds at Hargreaves Lansdown.

Back in the U.S. Treasury market, 10-year U.S. Treasury yields
BX:TMUBMUSD10Y
dipping 4 basis points to 3.915% from 3.955% on Monday.

See: The yen got slammed after Bank of Japan stood pat. Here’s what’s next.

Traders were also warily eyeing the oil market, after benchmark Brent crude
BRN00,
+1.87%
jumped on Monday following BP’s statement it was halting shipments through the Red Sea, and thus the Suez Canal, because of attack’s by the Houthi in Yemen. Oil futures edged higher Tuesday.

Read: Deutsche Bank warned months ago that shipping was one of the economy’s weakest link. Here’s their must-see chart.

Many of the world’s biggest shipping companies have said they also will steer clear of the region, prompting concerns about rising costs that may build inflationary pressures.

The U.S. is launching a naval coalition to stop the Houthi attacks.

In a statement, U.S. Defense Secretary Lloyd Austin said the “international challenge…demands collective action.” The naval coalition, dubbed, Operation Prosperity Guardian, is supported by allies including the United Kingdom, Bahrain, Canada, France, Italy, the Netherlands, Norway, Seychelles and Spain.

Companies in focus

• Alphabet Inc.
  GOOG,
  +0.53%
  shares were 0.5% higher Tuesday after court papers Monday showed the search giant agreed to pay $700 million to settle some of the allegation it has been stifling competition in its app store. The filings in San Francisco federal court show some of the specifics in a September deal with state attorneys general.

• FuelCell Energy Inc.
  FCEL,
  -7.84%
  shares were 7.5% lower Tuesday after the fuel cell energy technology company had a revenue miss in its fiscal fourth quarter. The $22.46 million in revenue missed FactSet consensus of $25 million.

• UBS Group AG
  UBS,
  +5.41%
  shares were 4.3% higher Tuesday after a €1.2 billion ($1.31 billion) stake announced by Swedish activist investor Cevian Capital that thinks the shares should be able to double in worth. “Cevian sees significant value potential in UBS,” managing partner and co-founder Lars Förberg said in a statement.