There were decent gains for US stock indices across the board yesterday, as investors considered the outlook for more rate cuts this year. The rally took all four of the major US indices to fresh record highs.
The Dow could only manage a relatively modest advance, ending the session up 0.3%, while the S&P and NASDAQ added 0.5% and 0.9% respectively. But it was the small-cap, domestically focused Russell 2000 (see below), which came roaring back to life, finishing the session 2.5% higher.
Source: TN Trader
This finally established a fresh all-time high for the index as it nudged above its previous record intra-day high from November last year. Any reduction in borrowing costs is seen as beneficial to small caps, as these companies often hold a lot of debt, which in turn tends to be floating rate rather than fixed. In contrast, big tech companies are often cash-rich, and any debt is fixed-rate and cheap.
US stock futures were flat in early trade this morning, with a slight positive bias. It will be interesting to see how investors behave going into the weekend. Looking back at the FOMC meeting on Wednesday, it’s worth noting that there were a wide range of forecasts in the FOMC’s Summary of Economic Projections, including an expectation that the labour market would improve.
Yet in his subsequent press conference, Fed Chair Jerome Powell said that employment risks have risen significantly recently and now outweigh inflation risks. In addition, if President Trump gets his way, then there could soon be a far more dovish element on the FOMC than there is currently.
This may not be a good thing as cutting rates aggressively with unemployment low, growth ok and inflation above target risks overheating the economy. In addition, it’s important for investors to believe that the US central bank is independent and apolitical, even if it isn’t.