U.S. stocks edged higher on Tuesday to push the major indexes to new highs for the year, after inflation data did little to alter expectations for the timing of a rate cut by the Federal Reserve, as investors eyed the central bank’s last policy decision of the year on Wednesday.
The November Consumer Price Index (CPI) rose 3.1% on an annual basis, in line with estimates from economists polled by Reuters, as a drop in gasoline prices was overshadowed by a rise in rents. Core prices, excluding volatile items such as food and energy costs, also matched expectations, showing a 4% annual rise.
On a month-on-month basis, consumer prices ticked up 0.1% last month, compared with estimates of remaining unchanged.
Markets had recently been pricing in a rate cut by the Federal Reserve as soon as March, but traders pared those bets and are now targeting May for the first rate cut after the central bank began its hiking cycle in March 2022.
Expectations for a cut of at least 25 basis points in March fell to 43.7%, from about 50% before the data, according to the CME Group’s FedWatch Tool. The market is now pricing in a chance of about 78% for a cut in May, up from about 75% on Monday.
“The market is certainly assuming that inflation is going to keep coming down, that earnings in this next year are going to show some decent growth and the Fed is going to cut rates,” said Scott Wren, senior global market strategist at the Wells Fargo Investment Institute in St. Louis.
“The market is counting on more of a soft landing that would allow the Fed to ease up.”
The Dow Jones Industrial Average rose 113.66 points, or 0.31%, to 36,518.59, the S&P 500 gained 12.13 points, or 0.27%, to 4,634.71 and the Nasdaq Composite gained 68.53 points, or 0.47 %, to 14,501.01.
Markets will get another look at inflation data in the form of the Producer Price Index (PPI) before all eyes turn to the Fed’s policy announcement at the conclusion of its two-day meeting on Wednesday.
The European Central Bank and the Bank of England are also scheduled to deliver their policy verdicts later this week.
Oracle slumped 12.2% as the cloud services provider forecast third-quarter revenue below estimates on slowing demand for its cloud service.
Energy was the worst-performing of the 11 major S&P sectors, falling more than 1% as crude prices slid. The tech sector, however, was among the best-performing, touching a record high as it is on track for its biggest yearly percentage gain since 2019.
Google-parent Alphabet dipped 0.8%, after “Fortnite” maker Epic Games prevailed in its high-profile antitrust trial over the company.
Advancing issues were roughly even with decliners on the NYSE while declining issues outnumbered advancers by a 1.1-to-1 ratio on the Nasdaq.
The S&P 500 posted 69 new 52-week highs and 2 new lows while the Nasdaq recorded 171 new highs and 158 new lows.
The federal funds futures market on Friday was pricing in a 46% chance of a cut at the Fed’s March meeting, and a nearly 80% chance of a cut in May, according to the CME FedWatch tool.
Many investors believe stocks can continue rising in the weeks and months ahead, with the S&P 500 just 4% from making a fresh all-time high.
Past rate cycles have shown that stocks tend to climb during the period when monetary policy is “on hold.” The S&P 500 has gained an average of 5.1% in periods that the Fed has paused its rate-hiking cycle and before the central bank’s first cut, according to an analysis of nine such periods by ClearBridge Investments.
The S&P 500’s rally has brought it back to around where it stood when the central bank last raised rates in July, “suggesting there could be upside” from current levels, ClearBridge strategists said in a Dec 4 blog post.
At the same time, a period of strong gains often sees stocks continuing to push ahead for months, according to Ryan Detrick, chief market strategist at The Carson Group. The S&P 500’s 8.9% gain in November put it in the 20 best-performing months since 1950, Detrick wrote in a recent report.
The index was higher a year later 80% of the time after those exceptional months, rising 13.3% on average, according to Detrick.
Still, the market’s recent gains could warrant caution.
Angelo Kourkafas, senior investment strategist at Edward Jones, said a hotter-than-expected number in consumer price data due out on Tuesday could drive a short-term pullback.
Stocks jumped last month after the October consumer price index was unchanged for the first time in over a year, boosting expectations the Fed was done tightening.