Dow Jones edges higher after notching 5th straight record close

What’s driving markets

U.S. stocks edged higher on Wednesday, brushing off a lower open, with the S&P 500 within sight of its all-time closing high of 4796.56 recorded on Jan. 3, 2022. The S&P 500 and Nasdaq each flipped higher during the first 30 minutes or so of New York trading.

The large-cap benchmark S&P 500 has jumped 24.4% this year, partly powered by hopes that the U.S. economy has not been too badly damaged by the Federal Reserve’s ratcheting up of interest rates to cool inflation.

The latest leg of the rally reflects hopes that with inflation back down to 3.1%, the central bank will begin quickly trimming borrowing costs next year. Not even a concerted effort by Fed officials to counter the market’s rate-cut optimism has damped the ardor of traders.

See: Why the 60-40 portfolio is poised to make a comeback in 2024

The current bullishness is perhaps also reflective of seasonal trends, with optimism about a festive bounce underpinning stocks. The “Santa Claus Rally” period stretches from the last five trading days of the year to the first two trading days of the new year, according to the Stock Trader’s Almanac.

Since 1950, the S&P 500 has averaged a gain of 1.32% and closed higher 78.1% of the time over that period, according to Dow Jones Market Data.

With stocks on a tear since the end of October amid what’s been described as an “everything rally,” “valuations are once again a bit stretched so the market is taking a bit of a breather” on Wednesday, said Eric Sterner, chief investment officer at Apollon Wealth Management in Mount Pleasant, S.C., which manages about $7 billion in assets.

“The tailwinds, so to speak, include the Fed’s more dovish pivot that caught the market off guard,” Sterner said via phone on Wednesday. “And on the other side, some of the headwinds are that the markets have been on an incredible run and have pushed valuations very high historically speaking. We can debate whether there’s going to be a hard or soft landing, but we can all agree that the economy is slowing down and consumer spending is expected to slightly decrease in coming quarters.”

In U.S. economic data, existing-home sales rose 0.8% in November to 3.82 million, the National Association of Realtors said on Wednesday. Sales of previously owned homes unexpectedly inched up last month, snapping a five-month slump as easing mortgage rates encouraged some U.S. home buyers.

Meanwhile, the U.S. consumer confidence index rose to a five-month high of 110 in December, up from a downwardly revised 101 in the previous month, the Conference Board said Wednesday.

Investors will continue seeking insights from more economic data later this week, which may provide clarity on the Fed’s interest-rate path in 2024. A revision of the third-quarter GDP print is expected Thursday morning, followed by Friday’s personal-consumption expenditures (PCE) inflation report — the Fed’s preferred inflation gauge.

For 2024, the financial market “is putting a lot of weight” on a narrow scenario that includes inflation coming down, the U.S. avoiding a recession, and the delayed effects of higher interest rates failing to materialize, according to Jim Besaw, chief investment officer of GenTrust, an investment management firm with offices in Miami, New York, and Puerto Rico.

“We believe inflation is unlikely to come down to the extent the market believes absent a recession, making rate cuts without a recession less likely than the market believes,” Besaw wrote in the firm’s 2024 outlook. “We also believe the odds of a recession are significantly higher than the market believes.”

Read: Sticky inflation in a key part of the U.S. economy is the biggest barrier to Fed rate cuts

Companies in focus

• Shares of Tesla Inc.
  TSLA,
  -0.16%
  slipped 0.4% amid reports that the automaker has decided to cut out merit-based grants from employee-compensation packages.

• Shares of Alphabet Inc.
  GOOGL,
  +3.14%
  jumped 3% on Wednesday following a Reuters report that said its Google unit plans to reorganize a large part of its advertising-sales unit.

• Shares of FedEx Corp.
  FDX,
  -10.85%
  slumped 11% after the package-delivery giant trimmed its full-year sales forecast amid continued concerns about subdued shipping demand through the peak holiday season.

• Shares of General Mills Inc. 
  GIS,
  -2.44%
   were off 2.4% after the consumer-foods company missed fiscal second-quarter revenue expectations and lowered its full-year outlook as consumers continue “stronger-than-expected value-seeking behaviors.” 

See: The year that wasn’t: 10 Wall Street forecasts for 2023 that didn’t pan out

— Jamie Chisholm contributed.