The S&P 500 notched a new high on Thursday, after a momentous cut to interest rates from the Federal Reserve invigorated a global market rally.
Stocks had been butting up against the high for the past two weeks, after recovering from a round of turmoil in late July and early August. But the Fed’s announcement on 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 percent gain on Thursday, the S&P 500 crossed above its last closing record, reached in mid-July. The Russell 2000 index of smaller companies more sensitive to the ebb and flow of the economy rose 2 percent.
“This can only be a good thing for equities,” said Colin Graham, head of multi asset strategies at Robeco, an asset management firm.
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 percent 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.
On Wednesday, Jerome H. Powell, chair of the Fed, walked that tightrope carefully.
“The U.S. economy is in a good place, and our decision today is designed to keep it there,” Mr. Powell said at a news conference after the rate decision was announced.
Quincy Krosby, chief global strategist at the retail brokerage firm LPL Financial, said that “they made it clear that this is not an emergency rate cut,” which would have spooked the market.
Still, there are risks to consider. One is that stock valuations have climbed to lofty levels, and companies will have to deliver strong financial results to back those up. Companies will begin to report profits for the third quarter, which ends in September for most businesses, next month.
Geopolitics, the U.S. presidential election and a softening labor market could also curtail the rally over the next months.
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.
For investors, there is typically no difference in returns based on who wins the election, said Joseph Davis, global chief economist at Vanguard. But any uncertainty in the wake of the election could also weigh on markets, he said.
For now, the Fed’s cut has been welcomed across global markets. With central banks around the world already cutting rates, the big move in tandem by the Fed should ease pressure on their currencies.
The dollar has fallen roughly 5 percent against a basket of currencies representing its major trading partners since the end of June, as investors began to price in the prospect of rate cuts.
Major stock indexes in Europe and Asia rose on Thursday. The Europe-wide Stoxx 600 index had its best day in more than a month, while the Japanese Nikkei 225 rose over 2 percent.
“When you have the head of the world’s most important central bank announcing that he is committed to easing monetary conditions, of course stock markets will like that,” said Steve Sosnick, chief strategist at Interactive Brokers.
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