Falling rates are generally good news for stocks because lower borrowing costs can boost corporate profits and increase the value of investors’ holdings. Photo / 123rf
Falling rates are generally good news for stocks because lower borrowing costs can boost corporate profits and increase the value of investors’ holdings. Photo / 123rf
Stocks on Wall Street notched new highs Thursday (Friday NZT), after a momentous cut to interest rates from the Federal Reserve invigorated a global market rally.
Markets had been butting up against the high for the past two weeks, after recovering from a round of turmoil in late July andearly August. But the Fed’s announcement Wednesday that it would lower rates by a half a percentage point erased uncertainty about a decision that has loomed over financial markets for months.
The Fed’s cut was double the quarter-point adjustment it typically makes, and the central bank projected additional cuts to come this year.
It often takes the market a day or two to determine its path after a big event like the Fed decision, and stocks had wobbled in the immediate aftermath of the rate cut Wednesday afternoon before optimism took hold in the markets overnight.
With a 1.7% gain Thursday, the S&P 500 crossed above its last closing record, reached in mid-July. The Dow Jones industrial average rose 1.3% and also closed at a record. The Russell 2000 index of smaller companies more sensitive to the ebb and flow of the economy rose more than 2%.
Falling rates are generally good news for stocks because lower borrowing costs can boost corporate profits and increase the value of investors’ holdings. The hope now is that easier financial conditions could spur a new leg of gains that have already lifted the S&P 500 roughly 20% this year.
Much of this year’s gain was led by technology companies, especially those on the forefront of developments in artificial intelligence, but investors have begun to shift out of those investments over the past month. Instead, parts of the market that will benefit from lower rates, like real estate and consumer discretionary stocks, have picked up the slack.
Investors also have to consider, however, that the Fed’s aggressive cutting could mean that policymakers are becoming more worried about the economy, with officials raising their forecast for unemployment going forward as the labor market has softened.
Analysts have noted that the stock market tends to pull back in the month leading up to a presidential election, as investors await the winner and with it greater clarity on the policy backdrop that could influence markets going forward.
