It is the Fed's rescue. Again.
Shares hit a record high Thursday, one day after the Federal Reserve opened the door to interest rate cuts in the coming months. The signals from the central bank seemed to confirm increasing security among investors that the Fed would cut rates this summer in light of a slower global economy, downward signals from financial markets and uncertainties related to the US and China trade war.
S & P 500 closed 1 percent to 2,954.18 and obscured the previous high-water mark for the US stock benchmark index reached on April 30.
June's jump has repaired all the damage done during an ugly May. A decline was partially rejected, as talks between China and the United States publicly fell apart in a storm of tweets, accusations and the introduction of new tariffs. And sales were accompanied by other indications that investors were setting a darker outlook for the world economy: tumbling oil prices and falling bond yields.
But stocks ceased to fall in early June, after a number of federal bank officials assured investors that the central bank could lower interest rates if the trade war started showing signs of damaging the economy.
The message came through. In the futures market, where investors are investing in the move of the Fed Funds rate – the Fed's aim to set monetary policy – investors began to increase the effort that the Fed would cut rates at the next monetary policy meeting in July. In May, the market set approx. 20 percent on such a move.
At the beginning of June, these odds had risen to about 70 percent. As the odds of an increase increased, partly driven by several comments from the Fed chair, Jerome H. Powell, stocks began to climb back toward highs reached Thursday.
The increase in June is a repetition of a situation in January when the central bank relied on its plans to continue raising interest rates. At that time, the concern that higher rates – on top of the trade war, was slowing down growth and the fact that economic expansion is a decade old – would tip the US economy into recession. So the withdrawal, a "pivot" on market conditions, was welcome relief and led to the strongest start for stocks a year since 1987. "19659006]" It was more than a pivot, it was a pivot plus a full capitulation, "Bill Zox said. , Chief Investment Officer for fixed income at Diamond Hill Capital Management, a money management company in Columbus, Ohio. "It is well-liked all the markets:" The Fed will do what we want. ""
Following the Fed's Monetary Policy Announcement on Wednesday, investors set the likelihood of a cut in interest rates at the Fed's next July meeting at 9 am. 100 percent.
These expectations have helped drive long-term bond yields lower. Thursday afternoon, the yield on the 10-year government bond – an important benchmark – fell below 2 percent for some time. The 10-year note has not been closed below since November 2016.
Falling government bond yields – which arise as bond prices rise – are typically seen as an indication that investors are predicting weaker growth and lower inflation ahead. Such a prospect seems to be incompatible with a stock market that is nearly 18 percent this year.
However, since central banks have repeatedly taken action to help the economy recover the major recession, bond and stock markets have often risen at the same time as investors in both asset classes expected benefits from a light monetary policy.