Year-End Stock Rally Pushes S&P Near Record High

The Standard & Poor's 500 Index hovered just inches away from a new high on the final day of trading of 2023, piling on to a year-end rally that had already pushed the Dow Jones Industrial Average to record highs.

Investors continue to cheer signals from the Federal Reserve that it is done raising interest rates to fight inflation and may begin to cut rates in the months to come. And most strategists do not see a severe economic downturn on the horizon as a result of the Fed's actions.

The S&P closed about 0.5% short of its all-time high of 4,796.56 set in January 2022 on Thursday. The Dow hit an intraday record high of 37,779 on Thursday, following a string of new highs set earlier in the month.

Stocks pulled back only slightly in light trading as the trading year ended on Friday. The S&P closed down 14 points, or 0.28% to 4,770 on Friday. The Dow was down 21 points, or 0.05% to 37,690. And the tech-heavy Nasdaq Composite Index was down 0.56% at 15,011.

The S&P has logged nine consecutive weekly gains, its longest winning streak since 2017. Year-to-date, the index is up nearly 25% compared to nearly 13% for the Dow and about 44% for the Nasdaq.

The gains are particularly remarkable when considering that almost no one expected the stock market to perform well at the beginning on the year, let alone set record highs.

Mike Wilson, chief U.S. equity strategist at Morgan Stanley, predicted a corporate earnings recession earlier this year and reiterated it in June, saying the S&P would end the year at 3,900 and not hit 4,200 until the second quarter of 2024.

Notably, one well-known market strategist got it right. A year ago, Tom Lee, managing partner at Fundstrat, predicted the S&P would end the year at 4,750, within 1% of where it sits today.

It was a bold call following a bear market that soured most of 2022, and while most economists were expecting a recession. "A 'soft landing' is the highest probability," Lee wrote.

Throughout the year, the Federal Reserve dominated the calls for the market's direction. Investors worried the central bank would plunge the economy into a recession with its inflation-fighting interest rate hikes. They also worried about disruptions, including a few regional bank failures, a spike in oil prices and wars in Ukraine and the Middle East.

The Fed ended its final meeting of the year on Dec. 12-13, with its key rate still at 5.25% to 5.5%, a 22-year high, where it has sat since July. The market has picked up steam as investors concluded that the Fed had made its last hike, inflation was lower and the economy remained strong.

Much of the rally, however, has centered around gains in just seven stocks, known as the magnificent seven: Alphabet, Amazon, Apple, Meta Platforms, Microsoft, NVIDIA, and Tesla. The market rally, however, now appears to be expanding to other stocks, analysts say.

Wall Street is betting on lower interest rates, now that inflation has fallen much closer to the Federal Reserve's target of 2%. Inflation is down to 3.1%, as measured by November's CPI, which peaked at over 9% in June 2022.

Traders are betting on about an 83% chance the Fed will cut rates in March, and about 16% chance it will cut rates when it meets Jan. 30-31, according to the CME FedWatch Tool. which is based on Fed funds futures trading.

The final week of 2023 is on track to deliver a rare performance.

Adam Turnquist, chief technical strategist for LPL Financial, notes that since 1950 only about 25% of eight-week winning streaks go on to notch a ninth week.

"Consistent buying pressure of this magnitude is not only rare but a bullish sign for improving investor sentiment and market momentum," he said "And while all winning streaks eventually end, history suggests the rally may not."