The Dow Hovers Near a Record as Trading Gets Underway in 2023's Final Full Week

In the early hours of Monday, U.S. stocks made modest gains, propelled by benchmark borrowing costs hovering near their lowest levels since the summer. The S&P 500 approached its all-time high, while the Dow Jones Industrial Average recorded a slight increase, following its attainment of an all-time high at the close of the previous week.

‍

Breaking down the market movements, the Dow climbed by 36 points or 0.1%, reaching 37,342. Simultaneously, the S&P 500 experienced a gain of 15 points or 0.3%, settling at 4,735. The Nasdaq Composite also saw an uptick, gaining 30 points or 0.2%, and trading at 14,843. In the preceding week, the Dow surged by 2.9%, concluding Friday at a record high, accompanied by a 2.5% weekly rise in the S&P 500 and a 2.9% surge in the Nasdaq Composite.

‍

As the last full trading week of the year commenced, the S&P 500 found itself at its highest level in nearly two years, positioned less than 2% away from its record high. Analysts are closely monitoring whether the stock market's seasonal tendency to rally in the second half of December will encounter potential exhaustion amid one of the most robust short-term rallies in recent years. Chris Larkin, the Managing Director for Trading and Investing at E-Trade from Morgan Stanley, emphasized the significance of this week in gauging the sustainability of the market's current momentum.

‍

The equity benchmark has witnessed an impressive seven-week winning streak, marking the best such run in six years and achieving a remarkable 14.6% gain during this period. The market's optimism is underpinned by expectations that the Federal Reserve will initiate interest rate cuts in the coming year. Notably, the S&P 500 has closed higher for seven consecutive weeks only 20 other times since 1964, extending this run to eight weeks on 12 occasions, as highlighted by Larkin.

‍

The 10-year Treasury yield, which had surpassed 5% in October, began the week trading around 3.95%. This downward trend in yields followed the Federal Reserve's apparent indication of a more dovish monetary policy pivot last week. However, the enthusiasm in both stock and bond markets was tempered early on Monday, as certain Fed officials, including New York Federal Reserve Bank President John Williams and Chicago Fed President Austan Goolsbee, sought to moderate expectations of imminent rate cuts.

‍

Despite the pushback from Fed officials, interest rate futures markets continue to price in 150 basis points of rate cuts from the Federal Reserve in the upcoming year. Stephen Innes, Managing Director at SPI Asset Management, noted that this anticipated decline in bond yields and the U.S. dollar is expected to provide support for risk assets throughout the week.

‍

Tom Lee, the head of research at Fundstrat, expressed confidence in continued stock market support. He highlighted the buying activity of fund managers who, until recently, had adopted a defensive stance due to concerns about the macroeconomic environment. Lee also pointed to potential performance chasing into the year-end, coupled with retail investors withdrawing $240 billion from ETFs and mutual funds despite a year where the S&P 500 rose by more than 25%.

‍

In economic news, the National Association of Home Builders reported a 3-point increase in its monthly confidence index for December, reaching 37. This marked the first rise in the index in five months, attributed to falling mortgage rates.