U.S. and Canadian stocks surged to a sharply higher close on Wednesday and Treasury yields tumbled in both countries after the Federal Reserve signaled that its interest rate-hiking policy is at an end and that it sees lower borrowing costs in 2024.
The Dow Jones Industrial Average rose more than 500 points and notched a record closing high, confirming the blue-chip industrial average has been in a bull market since Sept. 30, 2022, by common definition.
Canada’s main stock index rose almost 2% to a ten-month high in a broad-based rally. The U.S. 2-year Treasury yield, which is particularly sensitive to Fed policy moves, dove 30 basis points and the U.S. 10-year yield fell to its lowest since August. The Canada government five-year bond yield, closely followed for its impact on fixed mortgage rates, slumped to its lowest level since May.
The Federal Open Markets Committee left its fed funds target rate unchanged at 5.25%-5.50%. In its accompanying statement, the Fed acknowledged that inflation has eased and implied that the rate tightening cycle might be over. Its dot plot, which forecasts the potential path forward for monetary policy, hinted that lower borrowing costs could be in the cards in 2024.
“The Fed delivered an early holiday present this year,” said Greg Bassuk, CEO at AXS Investments in New York. “Investors are embracing change in Fed sentiment toward a more dovish stance. It really underscores the trade that investors have been making over the last few weeks; that rates are set to decline in the coming year.”
Economic data Wednesday showed U.S. producer prices (PPI) were unchanged in November, further evidence that inflation continues to meander down toward the Fed’s average annual 2% target.
“Some of the factors we believe that drove this change in sentiment is this week’s CPI and PPI data showing more consistency in inflation’s downward trajectory,” Bassuk added. “This allowed the Fed to gain greater confidence that its hawkish moves have begun to achieve their objectives.”
The Dow Jones Industrial Average rose 512.3 points, or 1.4%, to 37,090.24, the S&P 500 gained 63.39 points, or 1.37%, to 4,707.09 and the Nasdaq Composite added 200.57 points, or 1.38%, to 14,733.96.
“While I think the magnitude of the market response is exaggerated, the direction is correct: the Fed for the first time this cycle opened the door to rate cuts across a reasonable forecast horizon, and that is significant,” said Eric Winograd, senior economist at AllianceBernstein in New York.
The day’s rally was broad-based with all major S&P 500 sectors ending higher. The rate-sensitive S&P 500 real estate and utilities sectors rose more than 3% each, leading sector gains. The small-cap Russell 2000 index shot up 3.5%.
The S&P 500 and Nasdaq hit fresh closing highs for the year. The S&P 500 is now up 22.6% for the year to date, while the Nasdaq is up 40.7% in that period and the Dow is up 11.9%.
The Dow’s recovery from its September 2022 low was led by Boeing, which has more than doubled over that time, and by and Salesforce and Intel, both soaring over 70%.
Walgreens Boots Alliance has been the worst performer among the Dow’s 30 constituents over that 14 month period, down 22%.
Stocks have been rising for weeks on the view that the Fed is likely done hiking rates and will shift to rate cuts next year.
Following the Fed statement, U.S. interest rate futures raised the odds of a May rate cut to 90% versus 80% just before the announcement, according to LSEG’s Fedwatch.
Bucking the day’s trend, shares of Pfizer dropped 6.7% after the drugmaker forecast 2024 revenue below Wall Street’s expectations.
In Toronto, the S&P/TSX composite index was up 395.61 points, or 1.96%, at 20,629.45, its highest close since Feb. 3. The real estate and the utilities sectors, which underperformed in an era of higher interest, were the top performers.
Among individual stocks, Bank of Nova Scotia added 1.1% after Canada’s No. 4 lender unveiled plans to focus more at home and Mexico in CEO Scott Thomson’s first shareholder meeting.
H&R Real Estate Investment Trust jumped nearly 10% after announcing the sale of Toronto waterfront property, 25 Dockside Drive, for C$232.5 million.
Vermilion Energy gained 6.2% buoyed by 2024 budget which included plans to boost dividend by 20%.
Transcontinental gained 3.5% after the packaging company reported a rise in fourth-quarter adjusted profit per share.
Volume on U.S. exchanges was 14.35 billion shares, compared with the 11.04 billion average for the full session over the last 20 trading days. Advancing issues outnumbered declining ones on the NYSE by a 7.01-to-1 ratio; on Nasdaq, a 3.18-to-1 ratio favored advancers. The S&P 500 posted 89 new 52-week highs and 1 new lows; the Nasdaq Composite recorded 195 new highs and 147 new lows.
Reuters, Globe staff