Wall Street is swept up in Fed euphoria. The rally could have more room to run

A version of this story first appeared in CNN Business’ Before the Bell newsletter. Not a subscriber? You can sign up right here. You can listen to an audio version of the newsletter by clicking the same link.

The Federal Reserve has kicked the year-end stock rally into overdrive. Investors say that it could have more room to run.

Stocks have already enjoyed a widespread rally in recent weeks, clawing out of a months-long rut as a pullback in bond yields and signs of cooling inflation boosted investors’ bets that the Fed will soon stop raising interest rates.

Then, the Fed on Wednesday held rates steady and signaled that it could cut rates three times next year, all but cementing that belief. While Wall Street isn’t in the clear just yet, investors are in celebration mode as it looks like the Fed could be done raising rates after a grueling tightening cycle.

The Fed “meeting was an absolute game changer,” said Anastasia Amoroso, chief investment strategist at iCapital.

The relief on Wall Street is palpable. CNN’s Fear & Greed Index, which tracks seven different indicators to gauge market sentiment, is at the high end of the “greed” reading and nearing levels last seen in early August.

The blue-chip Dow Jones Industrial Average on Thursday reached a record high for the second consecutive trading session, as Fed-induced euphoria swept Wall Street. The S&P 500 index is within reach of a new high, on pace to notch its longest weekly winning streak since October 2017.

US Treasury yields have moved sharply down as investors adjust their rate expectations. The yield on the 2-year note fell to about 4.4% on Thursday. The 10-year yield fell to 3.93%, its lowest level since late July, according to Tradeweb.

Boding well for the rally’s longevity is its continued broadening from the “Magnificent Seven” tech stocks that dominated Wall Street’s scoreboard for most of the year. Plus, the outlook for the economy is looking brighter than it’s looked in months, though it’s not certain that it will avoid a downturn next year.

“The probability of a soft landing is getting higher and higher,” said Tony Roth, chief investment officer at Wilmington Trust Investment Advisors. “I think the equity rally probably has legs.”

Here are some areas of the market climbing higher.

Oil and energy stocks: US crude prices have been on the decline, recently logging their longest streak of weekly losses in five years as investors worry that demand will falter in 2024.

Now, crude is on track to end the week higher. West Texas Intermediate crude futures, the US benchmark, settled at $71.58 a barrel on Thursday. Brent crude, the international benchmark, rose to $76.61 a barrel. Both are edging up again early Friday.

Energy stocks are also gaining. The S&P 500’s energy sector is on pace for its biggest weekly gain since mid-October.

Clean energy stocks, which have been hammered by high interest rates this year, have seen a particularly outsized boost. Plug Power shares have gained 19.5% this week, Enphase Energy shares have added 16.7% and SolarEdge Technologies shares have advanced 22.9%.

Gold: Last week gold prices hit record highs, then retreated. Investors tend to buy gold as a hedge against rising prices, betting that it will hold its value even as other assets don’t. This week, it’s declining yields on bonds and the pressure that exerts on the dollar that may explain why the yellow metal is going up again. The most-actively traded gold future contracts settled at $2,044.90 a troy ounce on Thursday.

“A weaker dollar and lower yields, if sustained, could continue to boost gold at a time when traders are feeling much more optimistic. Perhaps gold could enjoy a Santa rally of its own this year,” wrote Craig Erlam, UK and EMEA senior market analyst at OANDA, in a note on Thursday.

Financial stocks: Shares of financial institutions are rallying, after the collapses of regional banks in March sent investors fleeing from the sector. The KBW Nasdaq Bank Index, which tracks the performance of US banks and thrifts, has climbed 9% so far this week to trade near levels seen before the banking turmoil earlier this year.

Roth says that his firm is looking for opportunities to increase its financial stock holdings. Small-cap stocks, which are largely exposed to financial stocks, have rallied as soft landing optimism grows. That’s likely to continue, says Roth.

Spending at US retailers rebounded in November after declining in October, pointing to the continued resilience of the US consumer and a strong start to the holiday season, reports my colleague Bryan Mena.

Retail sales, which are adjusted for seasonal swings but not inflation, rose 0.3% in November from the prior month, the Commerce Department reported Thursday. That trounced economists’ expectations of a 0.2% decline, according to FactSet, and is a resurgence from October’s contraction, which was the first monthly decrease since the spring.

Excluding sales at gasoline stations, retail sales rose by an even stronger 0.6% last month.

Retail spending has only declined three times on a monthly basis since January, underscoring the remarkable strength of consumer spending this year.

Sales rose across most categories in November, increasing the most at restaurants, by a strong 1.6%. Americans also spent at a solid clip at specialty stores and online. Meanwhile, sales at gasoline stations declined the most in November, dropping 2.9%.

Thursday’s report shows that Americans continue to open up their wallets as inflation eases and the job market remains on a strong footing. That’s against the backdrop of the highest interest rates in 22 years and slowing economic growth.

Read more here.

Mortgage rates fell under 7% for the first time since mid-August this week. It is the seventh straight week that rates have dropped, as inflation improves and the Federal Reserve paused its rate increases.

With the Fed signaling in its most recent meeting that rate cuts may be coming in 2024, mortgage rates are expected to continue falling, reports my colleague Anna Bahney.

The 30-year fixed-rate mortgage rate fell to an average of 6.95% in the week ending December 14, down from 7.03% a week before, according to data from Freddie Mac released Thursday. A year ago, the average 30-year fixed-rate was 6.31%.

The average mortgage rate is based on mortgage applications that Freddie Mac receives from thousands of lenders across the country. The survey includes only borrowers who put 20% down and have excellent credit. A current buyer’s rate may be different.

“Potential homebuyers received welcome news this week as mortgage rates dropped below 7% for the first time since August,” Sam Khater, Freddie Mac’s chief economist, said in a statement.

Read more here.