Fed Delivers a ‘Dovish’ Surprise

The major market indices finished the week higher with the Dow closing at a new all-time high while the S&P 500 closed the week just shy of its record close of 4796 reached in early 2022.

December 18, 2023

Performance for Week Ending 12.15.2023:

The Dow Jones Industrial Average (Dow) finished up 2.92 percent, the Standard & Poor’s 500 Index (S&P 500) added 2.49 percent and the Nasdaq Composite Index (NASDAQ) gained 2.85 percent. Sector breadth was positive with 10 of the 11 S&P sector groups finishing higher. The Real Estate (+5.27%) sector was the best performer followed by Materials (+4.00%) and Industrials (+3.57%). The Communication Services sector (-0.10%) was the sole loser.

Index* Closing Price 12/15/2023 Percentage Change for Week Ending 12/15/2023 Year-to-Date Percentage Change Through 12/15/2023
Dow 37305.16 +2.92% +12.54%
S&P 500 4719.19 +2.49% +22.91%
NASDAQ 14813.92 +2.85% +41.54%

*See below for Index Definitions

MARKET OBSERVATIONS: 12/11/23  – 12/15/23

The major market indices finished the week higher with the Dow closing at a new all-time high while the S&P 500 closed the week just shy of its record close of 4796 reached in early 2022. The tech-heavy Nasdaq closed at a new 52-week high, but still remains well short of its all-time high of 16057 reached in November of 2021. Driving the gains was building hopes that the Fed can maneuver a soft landing for the economy after unanimously voting to hold rates steady for the third consecutive meeting. The Fed also penciled in three quarter-point rate cuts next year, a sharper pace than indicated in September’s projections. While the median forecast for the federal funds rate at the end of 2024 was 4.6 percent, individual Fed expectations varied widely. Eight officials saw fewer than three quarter-point cuts next year, while five anticipate more.

Fed Chair Powell candidly admitted the committee was discussing the timing of cuts, emphasized that policy was “well into restrictive territory” and made other comments seemingly validating market easing expectations. In terms of when to begin cutting rates, Powell said, “that begins to come into view and is clearly a topic of discussion and also a discussion for us at our meeting today.” A tweak in the Fed’s post-meeting statement also highlighted a shift in tone, with officials noting they will monitor a range of data and developments to see if “any” additional policy firming is appropriate. That word was not present in the November FOMC statement. In another shift, the inflation outlook was marked down modestly, and while growth was slightly lowered for 2024, unemployment remained low throughout the forecast. In trying to understand the pivot, it seems the Fed has shifted its focus to growth and less so towards inflation.

Managing Expectations: In what appeared to be an effort to manage forward rate expectations and leave the Fed some optionality, two Fed officials pushed back on the markets rate cut expectations on Friday. While the Fed’s latest “dot plot” showed the potential for three rate cuts next year, investors are currently discounting as many as six cuts, starting at the March 2024 meeting, according to Bloomberg’s World Interest Rate Probability tool. Atlanta Fed President Raphael Bostic said he expects the Fed to begin cutting interest rates “sometime in the third quarter” of 2024 if inflation falls as expected. Bostic expects progress on the central bank’s inflation target to warrant two quarter-percentage-point rate cuts over the second half of next year. Meanwhile, NY Fed President John Williams, speaking on CNBC, said that it would be "premature" for the Federal Open Market Committee to think about cutting its key interest rate in March. "We aren't really talking about rate cuts right now," he said. Rather, the question is: "Have we gotten monetary policy to a sufficiently restrictive stance in order to ensure that inflation comes back down to 2 percent?" he said. "It is looking like we are at or near that in terms of sufficiently restrictive, but things can change," Williams said, adding that the Fed needs to be ready to tighten policy more if progress on inflation stalls or reverses.

Economic Roundup: Consumer prices ticked up modestly in November, reinforcing the Fed’s resolve to keep interest rates elevated in the near term. The so-called core consumer price index, which excludes food and energy costs, increased 0.3 percent following a 0.2 percent advance in October. From a year ago, it advanced 4 percent for a second month. The Fed favors the core metric as a better gauge of the trend in inflation than the overall CPI. Meanwhile, retail sales unexpectedly picked up in November as lower gasoline prices allowed consumers to spend more during the kickoff the holiday shopping season. The value of retail purchases increased 0.3 percent versus expectations of a 0.1 percent decline. Excluding gasoline, sales rose 0.6 percent. The so-called control group sales — which is used to calculate GDP — advanced 0.4 percent after stalling in the prior month. The measure excludes food services, auto dealers, building materials stores and gasoline stations. Last week, the Mortgage Bankers Association reported that mortgage rates fell for a fourth consecutive week, spurring a jump in applications for home purchases and refinancing. The contract rate on a 30-year fixed mortgage fell by 10 basis points to 7.07 percent in the week ended Dec. 8, the lowest since July. That boosted the group’s index of refinancing by 19.4%, the most since the start of the year. Home-purchase activity climbed 3.5% to the highest level since early August, the MBA’s data showed.

The Week Ahead: The key data release this week will be the PCE Core Deflator—the Fed’s preferred inflation barometer—on Friday. The report is expected to show core PCE rising 0.2 percent during November and by 3.4 percent from a year ago. Other reports of note include housing starts and building permits, existing home sales, the Conference Board’s reading on consumer confidence, the final reading on third quarter GDP, Leading Economic Indicators, and durable goods orders. The earnings calendar creeps back into the picture with nine members of the S&P 500 scheduled to release results. Notable reports include Nike, Micron Technology and FedEx. The Fed speaking calendar will be quiet with just Atlanta Fed President Bostic scheduled to speak on the economy and business outlook on Tuesday.

— By Michael Schwager, Chief Market Strategist, Managing Director


The Dow Jones Industrial Average is a price-weighted average of 30 blue-chip stocks that are generally defined as the leaders in their industry. It has been a widely followed indicator of the stock market since October 1, 1928.

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