US stock markets finished the trading session with gains, buoyed by the unexpected drop in retail sales. This downturn in consumer spending sparked optimism among investors that the Federal Reserve might soon ease its monetary policy by reducing interest rates in the upcoming months.
The Commerce Department’s latest report indicated a 0.8% fall in US retail sales for January, with significant declines observed at auto dealerships and gasoline stations. This decline surpassed expectations and offered a glimmer of hope to investors who were previously dismayed by inflation data that exceeded forecasts earlier in the week.
Neville Javeri, a portfolio manager at Allspring Global Investments, expressed optimism, suggesting that the weaker retail sales report could indicate a slowdown in consumer spending, potentially offsetting the concerns raised by the recent consumer price index (CPI) uptick.
Thomas Martin of GLOBALT added, “This suggests the economy might be showing signs of weakness, which, paradoxically, could be good news. It implies the Federal Reserve might be more inclined to reduce interest rates.”
Market Reactions and Rate Cut Speculations
Following the retail sales announcement, market participants adjusted their expectations for the Federal Reserve’s next moves. The probability of a rate cut of at least 25 basis points by May increased to 40%, with June’s chances rising to approximately 79%, based on the CME Group’s FedWatch Tool.
This shift in sentiment was further supported by a Labor Department report indicating that initial claims for state unemployment benefits were lower than expected, standing at 212,000 for the week ending February 10.
Investors are keenly awaiting the producer price index report due on Friday, hoping for additional insights into the economic landscape.
Stock Market Performance Overview
The stock market responded positively to the unfolding economic narratives:
- The S&P 500 ascended by 29.05 points, marking a 0.58% increase, to close at 5,029.67.
- The Nasdaq Composite edged up by 47.03 points, or 0.30%, ending the day at 15,906.17.
- The Dow Jones Industrial Average experienced a notable rise of 350.07 points, or 0.91%, finishing at 38,774.73.
Corporate Movements and Investor Sentiment
Alphabet saw a 2.17% decrease after Third Point dissolved its stake, while Apple encountered selling pressure as Berkshire Hathaway reduced its significant holding, and Soros Fund Management exited its position entirely. Despite these moves, Apple managed to recover slightly in late trading, closing down by only 0.1%.
The upbeat earnings season contributed to the market’s positive mood, with 80.3% of S&P 500 companies surpassing earnings forecasts, according to LSEG data.
CBRE Group’s shares leaped by 8.5% after the company predicted an annual profit well above market expectations, boosting the real estate sector of the S&P 500.
Wells Fargo’s shares surged 7.2% following the announcement that the US Office of the Comptroller of the Currency had lifted a 2016 consent order related to sales practices misconduct.
Sector Highlights and Notable Performances
Utilities, materials, and energy sectors, which had been lagging, posted significant gains. The Russell 2000 Index, representing small-cap stocks, advanced by 2.3%.
On the downside, Cisco Systems disclosed a workforce reduction plan of 5% and trimmed its annual revenue forecast, resulting in a 2.43% stock price decline. Deere & Co faced a 5.2% drop after revising its 2024 profit outlook downwards. West Pharmaceutical Services experienced a sharp 14.1% fall after its full-year forecast fell short of expectations.
Market Breadth and Volume
The market breadth was decidedly positive, with advancing issues outnumbering decliners by a 5.3-to-1 ratio on the NYSE and a 2.4-to-1 ratio on the Nasdaq.
Trading volume on US exchanges reached 12.24 billion shares, compared to the 20-session moving average of 11.7 billion, indicating heightened activity amidst the shifting market dynamics.
The US stock market’s positive close on February 16, driven by the unexpected dip in retail sales, has rekindled hopes among investors for potential interest rate cuts by the Federal Reserve. This sentiment, coupled with corporate earnings outperforming expectations, has injected a dose of optimism into the markets, despite underlying concerns about economic strength and corporate financial health. As the investment community anticipates further economic indicators, the dynamic interplay between consumer behavior, corporate performance, and Federal Reserve policies continues to shape the financial landscape.
Featured image credit: Pgiam via iStock