Stocks Just Hit a Record, Thanks to the Fed

By Matt Phillips

It’s the Fed to the rescue. Again.

Stocks hit a record high on Thursday, a day after the Federal Reserve opened the door to interest rate cuts in the coming months. The signals sent by the central bank seemed to confirm growing certainty among investors that the Fed would lower rates this summer, in the face of a slowing global economy, downbeat signals from financial markets and uncertainty related to the United States-China trade war.

The S&P 500 closed up 1 percent, at 2,954.18, eclipsing the previous high-water mark for the benchmark index of American shares that was reached on April 30.

The market is now up more than 7 percent this month, a rally led by shares of materials, technology and consumer discretionary companies.

June’s bounce has repaired all the damage done during an ugly May, a slump set off in part when talks between China and the United States publicly fell apart in a storm of tweets, recriminations and the imposition of new tariffs. And the sell-off was accompanied by other indications that investors were betting on a darkening outlook for the global economy: tumbling oil prices and falling bond yields.

But stocks stopped falling in early June, after a number of officials from the Federal Reserve reassured investors that the central bank could lower interest rates if the trade war began to show signs of hurting the economy.

The message got through. In the market for futures where investors bet on the movement of the Fed Funds rate — the rate the Fed targets to set monetary policy — investors began to increase wagers that the Fed would lower rates at its next monetary policy meeting in July. In May, the market was putting roughly 20 percent odds on such a move.

By early June, those odds had increased to roughly 70 percent. As the odds of an increase rose, fueled in part by more comments from the Fed chair, Jerome H. Powell, stocks began to climb back toward the high reached on Thursday.

The rebound in June is a repeat of a situation in January, when the central bank backed away from its plans to keep raising interest rates. At the time, the concern was that higher rates — on top of the trade war, slowing growth and the fact that the economic expansion is a decade old — would tip the United States economy into recession. So the retreat, a “pivot” in market terms, was welcome relief and led to the strongest start for stocks to a year since 1987.

“It was more than a pivot, it was a pivot plus a full capitulation,” said Bill Zox, chief investment officer for fixed income at Diamond Hill Capital Management, a money management firm in Columbus, Ohio. “That’s firmly the view of all markets: ‘The Fed will do what we want.’”

After the Fed’s monetary policy announcement on Wednesday, investors are putting the probability of a rate cut at the Fed’s next meeting in July at 100 percent.

Those expectations have helped drive long-term bond yields lower. On Thursday afternoon, the yield on the 10-year Treasury note — an important benchmark — fell below 2 percent for a time. The 10-year note has not closed below that since November 2016.

Falling government bond yields — which occur as bond prices rise — are typically viewed as an indication that investors foresee weaker growth and lower inflation ahead. Such an outlook would seem inconsistent with a stock market that is up nearly 18 percent this year.

But as central banks have repeatedly taken actions aimed at helping the economy recover from the Great Recession, bond and stock markets have often risen at the same time, as investors in both asset classes anticipated benefits from easier monetary policy.

A version of this article appears in print on , on Page B2 of the New York edition with the headline: Stocks Just Hit Record, Thanks to the Fed. Order Reprints | Today’s Paper | Subscribe