The Dow rallied into market close and the S&P 500 set a new closing record Thursday, one day after the Federal Reserve indicated it could cut interest rates soon.
The Dow (INDU) finished 0.9%, or 249 points, higher, while the S&P 500 (SPX) ended nearly 1% higher at a record of 2,954 points.
The Nasdaq (COMP) Composite closed 0.8% higher.
Stocks were briefly knocked off their highs earlier in the day as the relationship between the United States and Iran appeared to escalate.
President Donald Trump said at the White House Thursday afternoon “you’ll soon find out” whether the United States intended to strike Iran. Over night, a US drone was shot down by Iran in international airspace above the Strait of Hormuz, where two oil tankers were attacked last week.
“Stocks’ resilience in the face of growing US-Iranian geopolitical tension is a stark reminder not to fight the Fed. As the central bank’s dovish messaging continues to drive interest rates lower, it’s inoculating investors from other risks as the cost of capital and competition from bonds both fall,” said Alec Young, Managing Director of Global Markets Research, FTSE Russell, at the start of the trading day.
But this resilience may be fickle.
It will be interesting to see if this sentiment continues next week, Young added, when Trump and China’s President Xi Jinping are set to meet to talk trade at the G20 summit in Japan.
Other asset classes reacted more forcefully to the tensions in the Middle East. US oil prices jumped 5.8% to $56.65 a barrel and the price for gold climbed steadily closer to $1,400 an ounce.
The last time an ounce of gold was more than $1,400 was in 2013. Gold is a traditional safe haven investment, and the developments around Iran, along with the prospect of lower interest rates in the US are pushing up its price. Gold futures were last up 3.3% at $1,389, according to Refinitiv.
At Wednesday’s Fed meeting, Chairman Jerome Powell reiterated that the central bank would “act as appropriate” to sustain economic growth in the United States. Moreover, the Federal Open Market Committee now expects up to two possible interest rate cuts this year.
This was what the market wanted to hear and stocks finished higher.
While Powell stayed mum about whether the Fed’s July meeting would bring the first rate cut, the market is now certain that it will happen. Expectations for a July cut rose to 100% yesterday, according to the CME’s FedWatch tool.
Government bond yields, which express interest rate expectations, fell in response. The 10-year US Treasury yield dropped below 2% earlier for the first time since November 2016. It last stood at 2.0112%.
Bond yields move opposite to prices, so when prices go up, yields go down.
