North American stock markets extended their rally on Tuesday, as last week’s dovish policy pivot from the Federal Reserve continued to reverberate and investors looked ahead to crucial U.S. inflation data. Canada’s main stock index rose to an 18-month high, led by financial and forest product shares.
Broad-based gains boosted all three major U.S. stock indexes and nudged the S&P 500 to within one percentage point of its all-time closing high reached in January 2022. If the benchmark index closes above that level, that would confirm it has been in a bull market since bottoming in October 2022.
The blue-chip Dow nabbed another all-time closing high.
Small-cap stocks have had a strong run in December, and that continued on Tuesday, with the Russell 2000 leading gainers, rising 1.9%. The index has surged over 11.7% in December so far.
“It’s Fed fumes,” said Ross Mayfield, investment strategy analyst at Baird in Louisville, Kentucky. “And there’s no real catalyst at this point in the calendar year to provide any kind of downside pressure.”
“Obviously, the levels investors hold dear like bull and bear markets are important psychologically,” Mayfield said. “But what’s more important is the breadth is expanding, the momentum is there, and the economy is confirming this move.”
At the conclusion of the central bank’s policy meeting last Wednesday, the Federal Open Market Committee signaled that it had reached the end of its tightening cycle and opened the door to rate cuts in the coming year.
Atlanta Fed President Raphael Bostic said on Tuesday there was “no urgency” to begin cutting rates, given the strength of the economy and the slow rate at which inflation is cooling down toward the central bank’s 2% annual target.
Even so, at last glance, financial markets are pricing in a 67.5% likelihood that the Fed will implement a 25 basis point rate cut as soon as March, according to CME’s FedWatch tool.
“The market is probably running ahead of the Fed a little bit and the Fed is right to throw some water on that,” Mayfield added. “But the markets aren’t really buying it and the Fed is not doing much to change the narrative.”
On the economic front, a report from the U.S. Commerce Department showed groundbreaking on new single-family homes surged 18% to more than a 1-1/2 year high in November, much more than economists had forecast The S&P 1500 Homebuilding index and the Philadelphia SE Housing index advanced 1.6% and 1.2%, respectively.
Later in the week, the Commerce Department is expected to release its third and final take on third-quarter GDP on Thursday, to be followed by its broad-ranging Personal Consumption Expenditures (PCE) report on Friday, which will cover income growth, consumer spending, and crucially, inflation.
The Toronto Stock Exchange’s S&P/TSX composite index ended up 216.92 points, or 1.05%, at 20,839.63, its highest closing level since June 2022.
“Many investors are underweight equities and not positioned for a sustained market rally,” said Brandon Michael, senior investment analyst at ABC Funds. “The biggest risk for cash heavy investors is when to commit their ample cash reserves to the market.”
The Toronto market has strengthened 11.5% since October as investors bet that central banks will shift to cutting interest rates in the coming months.
“The market is forward looking and sees interest rates lower in the future and an economic outlook that’s improving,” Michael said.
Still, money markets reduced bets that the Bank of Canada would begin easing as soon as March after data showed Canada’s annual inflation rate unexpectedly remained at 3.1% in November.
Financials, the sector with the highest weighting on the TSX, rose 1.3%, while the materials group, which includes precious and base metals miners and fertilizer companies, advanced 2.4%.
Forest product companies were among the biggest gainers, with shares of Canfor Corp ending up 12.3%.
Gold and copper prices rose, while oil settled 1.3% higher at $73.44 a barrel, extending the previous session’s gains after attacks by Yemen’s Iran-aligned Houthi militants on ships in the Red Sea disrupted maritime trade.
Energy was up 1.5% and consumer staples added 1.4%.
The Dow Jones Industrial Average rose 251.9 points, or 0.68%, to 37,557.92, the S&P 500 gained 27.81 points, or 0.59%, to 4,768.37 and the Nasdaq Composite added 98.03 points, or 0.66%, to 15,003.22.
All 11 major sectors of the S&P 500 ended the session in positive territory, with energy and communication services enjoying the largest percentage gains.
Boeing rose 1.2% after German airline Lufthansa revealed it ordered 40 737-8 MAX jets from the planemaker.
Kenvue climbed 2.2% following a U.S. court ruling in favor of the consumer health company in a lawsuit over the company’s drug Tylenol.
Amgen advanced 1.1% after BMO upgraded the company’s shares to “outperform” from “market perform”.
Advancing issues outnumbered declining ones on the NYSE by a 4.68-to-1 ratio; on Nasdaq, a 2.85-to-1 ratio favored advancers.
The S&P 500 posted 48 new 52-week highs and 1 new lows; the Nasdaq Composite recorded 200 new highs and 82 new lows.
Volume on U.S. exchanges was 11.61 billion shares, compared with the 11.97 billion average for the full session over the last 20 trading days.
Reuters, Globe staff