President Joe Biden celebrated the stock market’s all-time high as the Dow Jones Industrial Average reached a record 40,000 on Thursday. This milestone is seen as a sign of confidence in the U.S. economy. The Dow is up 6 percent year-to-date, with Walmart shares leading the charge. The retail giant saw a 6 percent increase in its stock after reporting solid fiscal first-quarter earnings.
The stock market faced challenges when the Federal Reserve began raising interest rates in March 2022. The Dow Jones flirted with a bear market but has since rallied back by 38 percent on expectations that the central bank will ease rates. Other indexes have also reached all-time highs, with the S&P 500 up nearly 12 percent this year and the tech-heavy Nasdaq Composite Index rocketing about 12 percent.
President Biden expressed his enthusiasm for the record highs, stating that it is great news for Americans’ retirement accounts and a sign of confidence in the economy. He emphasized his commitment to building an economy from the middle out and bottom up, with investments that are making a difference.
However, the question arises: will the stock market continue its upward trajectory towards the 41,000 milestone? Market watchers are assessing various factors, including slowing economic conditions, inflation data, and Federal Reserve policy.
Investors were pleased with the latest consumer price index (CPI) report, which showed a dip in the annual inflation rate to 3.4 percent, in line with market expectations. Core inflation, excluding food and energy sectors, slowed to 3.6 percent. While there were increases in producer prices, import prices, and export prices, investors largely dismissed them.
Retail sales fell short of market projections, and industrial and manufacturing production came in below expectations. These factors, along with easing inflation pressures, have led Wall Street to anticipate rate reductions by the Federal Reserve. The CME Fed Watch Tool shows investors anticipating two quarter-point rate reductions starting in September.
Federal Reserve Chair Jerome Powell expressed his belief that inflation will move down but admitted to having less confidence due to the readings in the first three months of the year. He stated that a rate hike is unlikely in the next policy decision and that it is more likely to keep the policy rate where it is.
Fed Vice Chair Philip Jefferson believes it would be prudent to keep rates higher for longer until there is evidence that inflation will return to the 2 percent target. Balancing restrictive rates with weakness in the economy is a challenge, as some sectors are not sustainable under these conditions. There is a higher-than-expected recession risk, with a 65 percent probability compared to the overall market’s 25 percent expectation.
Corporate earnings reports have been strong so far this year, surpassing expectations. This has contributed to the stock market’s gains. Earnings expectations for S&P 500 firms continue to rise, fueling a bullish outlook and pushing the index to new all-time highs. Additionally, easy financial conditions have helped bolster stocks, with national financial conditions being the loosest they have been since early 2022.
Overall, while the stock market has reached new highs, there are considerations such as inflation, economic conditions, and Federal Reserve policy that may impact its future trajectory. Investors will continue to monitor these factors as they navigate the market.
