U.S. and Canadian indexes close higher on Friday
The U.S. and Canadian main indexes closed higher on Friday as investors focused on the possibility of a larger interest rate cut by the Federal Reserve next week. This optimism particularly benefitted rate-sensitive small cap stocks, which outperformed larger indexes. The TSX closed at a fresh record high and saw its biggest weekly gain in almost a year.
Expectations for Fed rate cut
Bets on the size of the Fed’s cut have been fluctuating, with probabilities for a 50 basis point cut jumping to 49% from 28% on Thursday, according to CME’s FedWatch Tool. Former New York Fed President Bill Dudley also added to the conversation by stating that there is a strong case for a 50-bps interest rate cut. Reports have indicated that the Fed faces a challenging decision on the extent of the cut.
Insight: Impact on investor sentiment
Investor sentiment surrounding the Fed’s potential decision is varied. While hopes for a larger cut sparked optimism in the stock market, it also raised concerns about the state of the economy. However, the fact that small cap stocks rallied suggests that investors may not see a 50 basis point cut as being indicative of an impending recession.
Small caps outperform
While large cap indexes were lifted by the renewed hopes for a bigger rate cut, the positive sentiment was most evident in the Russell 2000 small cap index, which saw a significant rise on Friday. Smaller companies are more sensitive to rate changes as they rely more on borrowed money and floating rate loans.
Canadian market performance
In the Canadian market, the S&P/TSX composite index ended with gains, setting a new record high and achieving its biggest weekly gain in years. This rally was fueled by optimism around the potential Fed rate cut. The materials group and technology sector were among the top performers, benefitting from rising commodity prices and lower borrowing costs.
Market movers
In U.S. trading, there were notable movements in specific stocks such as Adobe, Boeing, and Uber. Adobe saw a decline after issuing a lower-than-expected earnings forecast, while Boeing shares dropped due to a labor dispute. On the other hand, Uber shares rallied following an announcement about expanding autonomous ride-hailing services.
Overall market performance
All three major U.S. benchmark indexes closed near two-week highs and recorded substantial weekly gains. The S&P 500 and Nasdaq posted their largest weekly percentage gains since early November, while the Dow also saw positive movement. In Canada, the TSX composite index also ended the week on a high note, reflecting the overall positive market sentiment.
Conclusion
The market’s reaction to the possibility of a bigger Fed rate cut indicates a mix of optimism and caution among investors. While the prospect of lower interest rates provided a boost to the stock market, there are lingering concerns about the broader economic outlook. Additionally, specific sectors and individual stocks saw notable movements based on company-specific factors.
