by The stock market hit new highs on Friday, with the S&P 500 index finally hitting a record high after weeks of surpassing its previous peak.
The index, one of the most followed Wall Street benchmarks and a cornerstone of many portfolios, rose 1.2 percent to close above the high set in January 2022.
The record followed a stunning rally in the final months of 2023, as investors took advantage of signs of slowing inflation and signals from the Federal Reserve that it could begin to lift the brakes on the economy by cutting interest rates. But after nearly peaking in late December, the market lost some momentum as some inflation measures continued to rise, crucial shipping lanes in the Middle East came under attack and fears persisted that the market had risen. too much and too fast. .
The rally that finally pushed stocks over the edge was driven by gains among influential tech stocks like Apple, Microsoft, Meta and Nvidia, although the fierce rally that lifted these companies’ valuations last year has become more mixed in 2024. closely watched consumer survey showed a large increase in economic confidence along with moderate inflation expectations, which reinforced hopes for the economy.
A market top won’t eliminate anxiety about a possible recession or the risk that interest rates will stay high longer than investors currently expect, said Tom Logue, strategist at Commonwealth Financial Network. But it will help maintain some optimism on Wall Street, he said.
“For the average investor, for the retail investor, it’s a positive thing,” Logue said. “Psychologically, when prices hit an all-time high, it has an impact on people’s heads.”
It took about two years for the index to recover from a decline caused by fears that a budding inflation problem would push the Federal Reserve to try to curb price increases and, with them, the economy. That decline ended 10 months later, when concerns about an impending recession began to give way to hope in the economy’s resilience. With inflation slowing in recent months, investors have also begun to anticipate a change of course by Fed policymakers.
The bet that rates will fall in 2024 has given the S&P 500 its latest boost, taking its rise to about 35 percent from its October 2022 low. Friday’s record also helped confirm a new bull market: in Wall Street jargon refers to a period of exuberance that pushes stocks into new territories.
The S&P 500’s record high is a psychological sign for investors, in part because the companies in the index account for more than three-quarters of the value of the U.S. stock market, according to S&P Dow Jones Indices. About $11.4 trillion in funds and other assets are tied to the S&P 500, making its ups and downs a concern for nearly every investment manager.
Investors enjoyed about a decade and a half of gains during the index’s previous bull market, which ended in early January 2022. The latter stages were driven in part by pandemic stimulus measures and low interest rates, but that gave way to a rise in inflation to 40 highs for the year, prompting Federal Reserve policymakers to act.
The Federal Reserve’s rapid increase in interest rates, beginning in March 2022, sent shock waves through financial markets, forcing an abrupt adjustment to a new world of higher borrowing costs after more than a decade of very low rates that made borrowing cheaper and encouraged investors to take more risks in search of higher returns.
Persistent inflation, despite a series of gigantic rate hikes, stoked fears that the Federal Reserve would crush the economy as it tried to rein in prices. That dragged stocks lower and sent the S&P 500 into a bear market in 2022, erasing more than 20 percent of its value from January to October.
But stocks began to rise again, as companies and the economy showed much greater resilience than most investors expected. Consumers continued to spend, driving economic growth and allowing companies to continue aggressively raising their prices, boosting profits.
Another tailwind came from advances in artificial intelligence and bets on the technology’s ability to generate big profits in the future. Nvidia, the chipmaker, was one of the biggest beneficiaries of this trend: Its shares have risen more than 400 percent since the S&P 500 hit its lowest point, making it one of the few companies with a market value of more than 1 billion dollars.
It joined Alphabet, Amazon, Apple, Meta, Microsoft and Tesla as one of the “Magnificent Seven” stocks, which have had a huge impact on the performance of the S&P 500 due to their size.
The S&P 500 is weighted by market capitalization, meaning the moves of the largest companies contribute much more to the index’s performance. Adjusting the index to give all companies equal weight would put the S&P 500 about 5 percent below its record, highlighting the strong contribution of this small number of stocks.
As inflation has fallen and confidence in the economy’s prospects has increased, this dynamic has begun to change, and a broader set of companies has contributed to the market’s rally.
The Russell 2000 index, which tracks smaller companies that tend to be more sensitive to changes in the U.S. economy than the multinationals in the S&P 500, has also risen in recent months. But it is still about 20 percent away from its record, set in late 2021.
That has some analysts thinking there is more room for a rebound, and that slowing inflation will breathe new life into the market. Traders in the futures market are now betting that the Federal Reserve could begin lowering rates as early as March. If that view changes materially (due to a warning note from the central bank or economic data that undermines the outlook), it could lead to a tough stretch for stocks.
The S&P 500’s rally over the past 15 months has been periodically derailed by such pullback moments, with setbacks on the path to lower inflation, mixed earnings from major companies and economic threats from the war in Ukraine and the conflict. increasingly widespread in the Middle East. This.
There are other reasons to be cautious, as many economists predict the economy will slow in 2024, just as consumers begin to buckle under the weight of costly credit card debt and other loans.
