The S&P 500 Tops 5,200 to Extend Its Rally This Month

Stocks surged as yet another report indicating a slowdown in the labor market fueled speculation that the Federal Reserve may implement interest rate cuts within the year.

‍

The S&P 500 surpassed the 5,200 mark following news of a rise in jobless claims to levels not seen since August, surpassing analysts' expectations. This development prompted Fed traders to slightly increase their bets on policy easing for 2024. In the Treasury market, shorter-term maturities, which are more responsive to imminent policy adjustments, outperformed.

‍

Chris Larkin of E*Trade from Morgan Stanley remarked, "Time will tell whether it’s a one-off or part of a genuine cooldown in the labor market." He added, "Investors may have adjusted to the idea of the Fed waiting until September to cut interest rates, but that doesn’t mean they’re comfortable waiting indefinitely."

‍

The S&P 500 continued its upward trajectory, bolstered by gains made earlier in the month. Two-year yields dipped by two basis points to 4.8%, while longer-dated bonds experienced marginal losses ahead of a $25 billion sale of 30-year securities.

‍

The pound fluctuated after the Bank of England hinted at impending interest rate cuts, with Governor Andrew Bailey suggesting that markets had underestimated the pace of future easing measures.

‍

Considering that the S&P 500 has already surpassed the average Wall Street forecast for year-end 2024, investors are understandably questioning how much further it can climb. According to Doug Ramsey of Leuthold Group, another 10% gain isn’t implausible based on historical data analysis.

‍

Ramsey examined 80 years of historical data on bull-market rallies, particularly focusing on periods when unemployment was below 4% and the economic cycle was mature. He identified two periods meeting these criteria—one characterized by the S&P 500's longest bull-market advance during the 1960s, and the other marked by a 60% rally leading up to the dot-com bust.

‍

If the current rally mirrors these prior records in terms of duration and magnitude, the S&P 500 could reach 5,705 by year-end.

‍

Despite the rebound in May, the US equity benchmark remains within 1% of its all-time high. Chris Senyek of Wolfe Research believes that the rebound, although uncelebrated, is likely to continue, especially considering modestly negative economic surprises. Looking ahead to year-end, Senyek maintains a constructive outlook, barring signs of a recession or stubborn inflation that could prompt a Fed rate hike.

‍

Fed officials closely monitor labor demand and wage growth in their deliberations on interest rate adjustments. Recent data revealing a slowdown in hiring and an unexpected uptick in the unemployment rate suggest a cooling in the labor market after a robust start to the year.

‍

Jon Gray, President of Blackstone Inc., anticipates economic growth to decelerate as persistent inflation complicates the Fed's ability to lower borrowing costs. Gray emphasized that central banks are hesitant to lower rates due to concerns about inflation, predicting a single rate cut by the Fed this year.

‍

Joe Kalish of Ned Davis Research believes that if the economy continues to slow and the Fed is expected to cut rates, there will be substantial demand for US Treasury notes and bonds. However, Kalish cautioned that market conditions can change rapidly, particularly as today's bond buyers are more price-sensitive compared to those during the quantitative easing era.

‍

In summary, while prospects of Fed rate cuts have propelled stock markets, potential economic shifts and evolving market dynamics necessitate vigilance among investors.

‍