On Thursday, the Dow Jones (DJI) closed above 42,000 for the first time. The S&P 500 (SPY) added 95 points to close at 5,713. Markets are highly bullish about the Federal Reserve announcing a rate cut that exceeded expectations. Bank of America is even more optimistic about the pace of rate cuts by predicting a 75 bps cut by the end of this year.
The Fed’s rate cut when the market is at all-time highs is puzzling. It will encourage speculators to bid up shares in penny stocks that have no business being listed on the U.S. exchange. Still, the daily trading volume yesterday was 12.3 billion shares. This is above the 10.8 billion shares traded average based on the last 20 sessions.
Risk
The S&P 500 returns 14% on average in the six months following its first move in the rate cut cycle. This time, the index will rely heavily on the magnificent seven to continue to rise. Tech firms thriving in the artificial intelligence boom risk disappointing investors. If corporations realize that AI solutions are not paying off and that hiring inexpensive labor is a better investment, tech stocks could fall.
Your Takeaway
Investors should watch the currency market closely. Japan’s yen may weaken again, forcing the Bank of Japan to raise rates sooner. China’s yuan may weaken further. That would force the country to implement more aggressive stimulus spending.