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Jerome Powell knows that his job is not one to be applauded. The Fed chairman is usually the bearer of bad news: Inflation is too high, and the Fed will kill it.
But his speech on Friday in Jackson Hole, Wyoming, elicited cheers on Wall Street for the Fed chairman — and everywhere else, too. Just as important, it sparked a massive rally in stock prices that suddenly made many undervalued stocks look like stars.
The performance of the major indices doesn’t tell the whole story. The S&P 500, Nasdaq Composite and Dow Jones Industrial Average all rose more than 1.1%. Both the Dow and S&P ended the day slightly below their record closing levels in mid-July.
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But the real picture was bigger:
- The Russell 2000, which has been the subject of ridicule for most of the year, jumped 3.2%.
- The New York Stock Exchange’s ARCA Airlines Index, whose members suffer from volatile oil prices and are regularly buffeted by economic headwinds, rose 3.74%.
- The Philadelphia Housing Index rose 3.73%.
- All 11 sectors in the S&P 500 ended the day higher, led by real estate, which rose 2% on the day.
- Interest rates fell as bond prices rose. The yield on the 10-year U.S. Treasury note fell to 3.80%, just above a 52-week low of 3.67% on Aug. 5 but down from about 5% in October.
- Barchart.com data showed 335 stocks hit 52-week highs on Friday, compared with just 53 stocks hitting 52-week lows.
All this because Jerome Powell told a gathering of central bankers from around the world—and a national television audience—“The time has come to adjust policy. The direction is clear.”
Discounts coming soon
The rate cut is likely to be formally approved at the Fed’s September 17-18 meeting. The first cut is likely to be a quarter-point.
The US Federal Reserve chairman said that the key interest rate, which has been between 5.25% and 5.5%, will be lowered to 5% to 5.25%. But Powell strongly indicated that more rate cuts are coming. The Fed chairman said that the bank “does not seek or welcome a further slowdown in labor market conditions.”
Powell’s speech has created a window of opportunity for many investments.
Lower interest rates mean the cost of capital needed to start a business, build a new factory or buy a home will become less burdensome. The interest rate on a 30-year mortgage was below 6.5% on Friday.
But prices could still fall, and that could spark more buying and selling. The key is for 30-year mortgage rates to fall below 6 percent, real estate experts said Friday. That level, they believe, would prompt more homeowners to put their properties on the market.
Real estate-related stocks and ETFs rose. (buttock) Shares of the online real estate brokerage rose 18.9% to $11.08. (Z) It rose 5.2% to $56.35.
More economic analysis:
- Kamala Harris Sees Market Stars Allying Against Donald Trump
- CPI Report Upends Bets on Big Fed Rate Cut
- Main Street Firms Resist Wall Street’s Recession
If there’s more sales volume, both companies will benefit, though we shouldn’t expect Zillow to return to its all-time high of $199.90 anytime soon. It reached that peak during the COVID-19 pandemic when meme stocks dominated the stock market.
Biggest Winner: Housing
SPDR S&P Homebuilders ETF (XHB) which invests mostly in home builders and building materials suppliers such as Home Depot. (High resolution) Louise Companies (a little) Johnson Controls (JCI) The fund’s value rose 4.3% on Friday. The fund’s value is up 24.6% this year.
That’s better than the Dow Jones (up 9.3%), the S&P 500 (up 18.1%), and the Nasdaq (up 19.1%). Lower interest rates should help improve the bottom line for all 35 components in the fund.
Image source: Shutterstock
Investors lift shares of two major cruise companies, Norwegian Cruise Line Holdings (National Center for Health) Carnival Cruise Line (CCL) Norwegian shares rose 7.76% to $17.50. Carnival shares rose 7.5% to $16.61.
Reason: Lower interest rates would reduce the interest costs they pay on loans to buy ships and finance other activities.
In its fiscal 2023 year (which ended in November), Carnival said it paid $2.07 billion in interest. The company had $31.34 billion in debt due between 2024 and 2031.
Thus, lower interest costs flow through to net profit and boost earnings per share and stock prices.
Assuming inflation remains under control, which it did for most of the years between 2000 and 2020, that’s what investors can expect. For the record, the average annual increase in the consumer price index was 2.15% between 2001 and 2021, according to European Central Bank data. Data from the Federal Reserve Bank of St. Louis.
