As Markets Hit All-Time Highs, Biden Touts ‘Confidence’ in US Economy

Traders work on the floor of the New York Stock Exchange in New York City, on Sept. 26, 2023. Brendan McDermid/File Photo/Reuters

The Dow Jones Industrial Average rose to a record 40,000 on May 16, fueled by investor hopes that softer inflation data would prompt the Federal Reserve to cut interest rates. Unlocking this milestone signaled “confidence” in the U.S. economy, according to President Joe Biden.

The benchmark stock market index, featuring 30 companies listed on U.S. stock exchanges, rose to a session high of just above 40,051. Year-to-date, the Dow is up 6 percent.

Walmart shares led the march to a session high after the retail titan rallied more than 6 percent after reporting solid first-quarter earnings. The company’s stock has surged by nearly 20 percent in the year.

After the Federal Reserve began raising interest rates in March 2022 to a more than two-decade high, the Dow Jones flirted with a bear market (a decline of 20 percent or more). The index tumbled to a bottom in October 2022 and has rallied 38 percent on persistent expectations that the U.S. central bank will pivot on monetary policy and ease rates.

Other indexes have also touched all-time highs.

The S&P 500 firmed above a record 5,300, adding to its 2024 gains of nearly 12 percent.

The tech-heavy Nasdaq Composite Index picked up as much as 0.2 percent, reaching a record level. So far this year, the index has rocketed by about 12 percent.

President Biden celebrated the record highs, posting on social media platform X that “this is great news for Americans’ retirement accounts and another sign of confidence in America’s economy.”

“I’m building an economy from the middle out and bottom up – and our investments are making a difference,” President Biden said.

But will there be a quest to the 41,000 milestone? Market watchers are assessing a blend of factors, from slowing economic conditions to inflation data to Fed policy.

Data, the Fed, and Interest Rates

Investors were jubilant this week following the latest consumer price index report, which showed the annual inflation rate dipping to 3.4 percent, in line with market expectations. Core inflation, which excludes the volatile food and energy sectors, slowed to 3.6 percent.

Traders have dismissed mainly the higher-than-expected 0.5 percent boost to producer prices. Investors have also shrugged off the larger-than-expected 0.9 percent boost to import prices and 0.5 percent increase to export prices.

Meanwhile, in the wider economy, retail sales rose by zero percent, falling short of market projections of 0.4 percent and down from the downwardly revised 0.6 percent. Additionally, industrial and manufacturing production came in less than expected last month.

A trader works as a screen displays a news conference by Federal Reserve Board Chairman Jerome Powell following the Fed rate announcement, on the floor of the New York Stock Exchange in New York City on Dec. 13, 2023. Brendan McDermid/Reuters

Now that the Fed’s rate hikes are traveling through the economy and working as intended, Wall Street anticipates that slowing conditions and easing inflation pressures could encourage the monetary authorities to follow through on rate reductions this year.

According to the CME Fed Watch Tool, investors are penciling in two quarter-point rate reductions beginning at the September policy meeting.

Fed Chair Jerome Powell said at a bankers’ conference in Amsterdam on May 14 that he anticipates “inflation will move down” but conceded that his “confidence is not as high as it was, having seen the readings in the first three months of the year.”

“We’re just going to have to see where the inflation data fall out,” Mr. Powell said, adding that it is unlikely the next policy decision will be a rate hike.

“I think it’s more likely that we’ll be in a place where we hold the policy rate where it is.”

At a Cleveland Fed event on May 13, Fed Vice Chair Philip Jefferson said he believes it would be prudent to keep rates higher for longer.

“We continue to look for evidence that inflation is going to return to our 2 percent target. And until we have that, I think it is appropriate to keep the policy rate in restrictive territory,” Mr. Jefferson said.

Mimi Duff, the managing director of GenTrust, said it is a balancing act between keeping policy restrictive amid sticky inflation and cutting rates in response to weakness in the economy.

“Our primary concern is that large swaths of the economy are not workable at these restrictive rates for a long period of time, and that leads us to have higher-than-expected recession risks penciled in relative to the market,” Ms. Duff said in a note.

She added that the probability of a recession in the coming year is 65 percent compared with the overall market’s 25 percent expectation.

The Atlanta Fed GDPNow model estimates a 3.6 percent growth rate in the second quarter.

Earnings Supporting Wall Street Gains

Corporate earnings reports have performed well so far this year and defied forecasts.

“A bad economy? Publicly traded American companies aren’t seeing it, as corporate earnings expectations move steadily higher,” James Royal, a Bankrate analyst, said in a note. “Strong current earnings and increased earnings expectations are pushing the S&P 500 to new all-time highs.”

He added that earnings expectations for S&P 500 firms continue to rise, “helping investors to maintain a bullish outlook and giving the index the fuel to hit a series of new all-time highs.”

“First quarter earnings announcements have come in ahead of expectations,” John Lynch, the CIO of Comerica Wealth Management, said, adding that earnings per share growth for corporations—the amount of profit each outstanding share has earned—and additional liquidity “may boost equity prices higher.”

Easy financial conditions have also helped bolster stocks as Chicago Fed data suggest that national financial conditions are the loosest they have been since early 2022.