Traders on the floor of the New York Stock Exchange on May 16, 2024, when the Dow Jones reached 40,000 points for the very first time.
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Traders on the floor of the New York Stock Exchange on May 16, 2024, when the Dow Jones reached 40,000 points for the very first time.
Spencer Platt/Getty Images
The Dow Jones Industrial Average surpassed 40,000 points on Thursday for the first time ever, a sign of strong approval for the health of the US economy.
The trigger that pushed the market to an all-time high was the release of new data on Wednesday showing a slowdown in annual inflation after three straight months of higher-than-expected reports.
For investors, the news of slowing inflation came as a huge relief. Stubborn inflation constitutes one of the main challenges of an economy which is otherwise doing remarkably well.
The question now is whether these market gains can be sustained. The Dow Jones finally gave up its earlier gains and finished slightly lower at 39,869 points.
Here are three things to know about the state of the stock markets.
As the cliché says, it’s the economy, stupid
Investors began the year optimistic about the economy.
Part of this hope remains. Growth has been remarkably vigorous. The job market is doing incredibly well. And corporate profits have skyrocketed.
The biggest unknown remains inflation. The Federal Reserve raised interest rates to their highest level in more than two decades in an effort to rein in prices.
Interest rate increases have impacted the economy by increasing the cost of loans, such as mortgages and auto loans. High prices and high interest rates have been a double whammy for consumers.
After a series of higher-than-expected inflation reports in January, February and March, optimism began to evaporate.
Finally, investors got some relief with the government report released Wednesday, which showed annual inflation fell to 3.4% in April from last year. It is also lower than the previous month and in line with expectations.
In practice, reaching 40,000 is really no different than any other number.
But this represents a major psychological step.
Reducing inflation could allow the Fed to finally start cutting interest rates, providing a little relief to the millions of people in debt, whether it’s credit cards or home loans.
This could revive hopes of a coveted “soft landing,” when the Fed manages to calm prices without triggering a recession.
“The idea that the economy can continue to grow while inflation numbers fall has everyone excited,” says Marc Dizard, chief investment strategist at PNC Asset Management Group.
But the market recovery also concerns AI
The bull market it’s not just about economics.
Since last year, stock markets as a whole have been helped by the rise of companies linked to the new investment craze: artificial intelligence.
The gains were largely driven by seven companies widely referred to as the “Magnificent Seven.”
Satya Nadella, CEO of Microsoft, delivers a speech during the Microsoft Build AI Day in Jakarta, Indonesia on April 30, 2024. Artificial intelligence is a hot trend in the markets.
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Satya Nadella, CEO of Microsoft, delivers a speech during the Microsoft Build AI Day in Jakarta, Indonesia on April 30, 2024. Artificial intelligence is a hot trend in the markets.
Adek Berry/AFP via Getty Images
These companies – Microsoft, Google, Amazon, Apple, Alphabet, Meta, Nvidia and Tesla – helped develop broader markets.
Only three of these companies are included in the Dow Jones index. However, a rally in tech stocks can still have knock-on effects on the Dow.
All three major indexes, including the S&P 500 and Nasdaq, hit record highs earlier Thursday.
Market Outlook: Be Cautious
Despite Thursday’s gains and the milestone reached by the Dow Jones, future gains remain uncertain.
“We like the Dow to hit 40,000, don’t get us wrong,” says Dizard of PNC Asset Management. “But we just think it needs to be approached with caution.”
The Fed has already announced that it may cut interest rates three times this year. But this is no longer clear after the disappointing inflation data at the start of the year.
And the economy has held up pretty well, but it could slow further and potentially even fall into recession if interest rates remain high.
As high interest rates continue to be a burden on consumers, paying off debt may become more expensive.
Ultimately, however, the viability of stock markets will likely depend largely on one thing: the direction things take with inflation.
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