The stock market, particularly the S&P 500, has experienced a remarkable turnaround this year, culminating in setting a new annual high on Friday. This milestone follows the index’s best month in 2023, November, effectively erasing the significant losses it suffered over the summer. This recovery, driven by a widespread rally across various sectors, has brought a sense of celebration among investors.
The key factor contributing to this reversal is the perception that the Federal Reserve might have concluded its interest rate hikes, a central strategy in its battle against inflation. High interest rates have been a burden on corporate valuations by increasing costs for both consumers and businesses and making non-stock investments more attractive. The Fed Chair, Jerome H. Powell, reinforced investor optimism by suggesting that the economy is cooling as anticipated, allowing for a more measured approach going forward.
The S&P 500’s ascent, which saw a 0.6 percent increase on Friday, surpassed its previous yearly high set at the end of July. Since late October, the index has surged over 10 percent, marking its fifth consecutive week of gains, the longest streak since June. This rally has been broad-based, spearheaded by large technology companies but also supported by over 80 percent of the stocks in the index over the past month.
Despite many analysts’ expectations of a continuation of 2022’s downturn, the S&P 500 has risen nearly 20 percent this year. The November rally has brought the index within 4 percent of its highest-ever level, a threshold many consider essential to confirm a new bull market.
Inflation cooling and noticeable weaknesses in certain economic sectors have prompted the Federal Reserve to pause, aiming to curb inflation without triggering a severe economic downturn. Last month, Fed officials maintained interest rates, allowing previous increases to permeate the economy fully.
Investors have welcomed this cautious approach by the Fed, especially amid fears that the economy’s resilience could lead to further rate hikes and prolonged high rates. The 10-year Treasury yield, a crucial interest rate, has significantly dropped since its peak in October, reducing borrowing costs linked to it, such as mortgage rates, and subsequently boosting stock prices.
However, the S&P 500’s performance might not fully represent the broader economic challenges. Prolonged high interest rates could still adversely affect businesses. The Russell 2000 index, representing smaller U.S. companies, remains about 9 percent below its July end level, highlighting the varied impact of economic policies and market conditions across different company sizes and sectors.