After several twists and turns this year, stock investors are in the mood to celebrate. On Friday, the S&P 500 set a new high for the year after posting its best month of 2023 in November, in a rally that quickly erased the benchmark index’s sharp decline over the summer.
The reversal came as investors cheered signs that the Federal Reserve has finished raising interest rates, the main tool in the central bank’s effort to curb inflation. Those high rates have been a drag on corporate valuations because they raise costs for consumers and businesses and attract investment away from the stock market.
“We’re getting what we wanted, we now have the ability to act carefully,” Jerome H. Powell, chairman of the Federal Reserve, said at an event Friday.
With a rise of 0.6 percent on Friday, the S&P 500 surpassed the previous high of the year, set in late July. The index is up more than 10 percent from its late October low. This week was the fifth consecutive weekly gain for the index, its longest winning streak since June.
Investors have also been encouraged that the rally has been broad. It has been driven by the big tech companies that dominate the index, but has also been supported by a more than 80 percent rise in stocks in the index over the past month.
Overall, the S&P 500 is up nearly 20 percent this year, surprising many analysts who had predicted in early 2023 that the index would extend its struggle from 2022, when it fell about 20 percent. November’s rally has left the index just 4 percent below its all-time high, which many consider the bar that must be cleared to confirm a new bull market.
As inflation has continued to cool, pockets of weakness in the economy have given the Federal Reserve pause as officials try to curb rising prices without pushing the country into a serious recession. Federal Reserve officials held interest rates steady at their meeting last month to allow rate increases so far to be fully implemented in the economy.
Investors have welcomed the central bank’s caution after fears grew over the summer that the resilience of the economy, which grew at a rapid pace of 5.2 percent, in the three months until September – would lead the Federal Reserve to raise rates even further and keep them high for a long time.
The 10-year Treasury yield, one of the world’s top interest rates, has fallen nearly 0.8 percentage points from its peak in October, to about 4.2 percent, a huge move in that market. That drop has reduced borrowing costs that track the 10-year yield, as mortgage ratesand helped push the stock higher.
The drop has undone some of the rise in Treasury yields that had unnerved investors over the summer, dragging the S&P 500 down from its previous high for the year set in late July.
On Friday, the S&P 500’s rally coincided with a sharp drop in two-year Treasury yields, which are sensitive to changing investor interest expectations.
But some analysts and investors have warned that the S&P 500’s rise is not representative of the precarious position many companies across the country find themselves in. Even if the Federal Reserve refrains from raising rates further, they say, a long period of keeping rates at their current high level could still cause pain for American businesses.
The Russell 2000 index of smaller U.S. companies, which lack the scale of the S&P 500 giants and tend to feel the effects of changes in interest rates and economic swings more sharply, remains down about 9 percent. below their level at the end. July, and only a 4 percent increase on the year.
