Dow turns lower, but S&P 500 on pace for longest stretch of weekly wins in 6 years

How stock indexes are trading

• The Dow Jones Industrial Average
  DJIA
  was down 22 points, or 0.1%, at 37,226

• The S&P 500
  SPX
  fell 5 points, or 0.1%, to 4,713.

• The Nasdaq Composite
  COMP
  rose almost 47 points, or 0.3%, to 14,805.

All three indexes have gained more than 2% so far this week, according to FactSet data, at last check.

What’s driving markets

U.S. stocks were mixed Friday afternoon, with the Dow Jones Industrial Average attempt at a third straight record close on the line.

Equities have broadly rallied this week after investors digested a closely-watched reading on U.S. inflation and the Federal Reserve’s latest policy statement and projections on interest rates. The Dow, S&P 500 and Nasdaq Composite are all on track to log a seventh straight week of gains.

The “more optimistic tone of markets over the last several weeks has been justified,” Russell Price, chief economist at Ameriprise Financial, said in a Friday phone call. It’s “reasonable” for the stock market to be pricing in rate cuts by the Federal Reserve in 2024, with the recent drop in 10-year Treasury yields helping to lift equities, he said.  

Price said he’s expecting the Fed may begin cutting rates in June and the U.S. economy will slow to a “sustainable” pace of growth in 2024. In his view, real gross domestic product may rise 1.8% to 1.9% next year.

Nearly all of the S&P 500’s 11 sectors are up this week, while small-capitalization stocks have seen a stronger rally than large-cap equities.

The small-cap Russell 2000 index
RUT
was posting a weekly gain of more than 5% on Friday afternoon, according to FactSet data, at last check. The S&P 500 was on pace to rise 2.3% this week.

At his press conference on Wednesday, Fed Chair Jerome Powell gave “a nod” that inflation was on the right path and lower rates were on the horizon next year, according to Price. But when it comes to the federal-funds futures, Price said that traders appear to have gotten “too far ahead” in their bets on rate cuts.

Fed-funds futures pointed to the central bank starting to reduce its benchmark rate as soon as March, according to the CME FedWatch Tool.

Stocks hit a speed bump earlier in the session after New York Federal Reserve Bank President John Williams pushed back against rate those expectations during an interview with CNBC. “We aren’t really talking about cutting interest rates right now,” Williams said.

Inflation, as measured by the consumer-price index, slowed to a year-over-year rate of 3.1% in November, down significantly from last year’s peak of 9.1% in June.  But “it’s too early to call ‘mission accomplished’ just yet” for the Fed’s goal of bringing inflation down to its 2% target, said Price.

Still, Powell was explicit during his press conference about not needing a recession in order to cut rates, according to Nationwide’s chief of investment research Mark Hackett. “That was code for a soft landing,” Hackett said by phone Friday. 

Joseph Ferrara, investment strategist at Gateway Investment Advisors, told MarketWatch that Williams’s comments suggest the stock market may have rallied too far, too quickly.

“A lot of investors are still very much listening to the Fed. Although I do think we’re starting to see a little divergence between the Fed comments and investors sentiment,” Ferrara said during a phone interview. “The market rallied significantly these last couple of days, in my opinion, more so than what was justified.”

See: Williams says the Fed isn’t ‘really talking about cutting interest rates right now’

The S&P 500 is not far off its record close, reached Jan. 3, 2022, finishing Thursday just 1.6% off that peak, according to Dow Jones Market Data.

Meanwhile, the yield on the 10-year Treasury note
BX:TMUBMUSD10Y
was up slightly on Friday at around 3.93%, according to FactSet data, at last check. That’s after on Thursday finishing at its lowest level since July 26 based on 3 p.m. Eastern Time levels, according to Dow Jones Market Data.

On the economic news front Friday, the New York Fed’s Empire State manufacturing survey showed U.S. manufacturing activity continued to struggle as the gauge tumbled to a four-month low. Flash services and manufacturing PMIs from S&P affirmed that manufacturing activity remained weak, while services activity reached a five-month high.

Read: U.S. economy posts steady but lackluster growth at year’s end, S&P finds

Investors may see a more volatile session on a “triple-witching” Friday, with options contracts tied to more than $5 trillion worth of stocks and exchange-traded funds and indexes set to expire. Also, money managers will need to finalize changes to their holdings as the quarterly rebalancing of the S&P 500 and Nasdaq-100 will kick in after the market’s close Friday.

“The momentum in the market is undeniably incredibly strong right now,” said Nationwide’s Hackett, though on Friday investors appeared to be taking “a natural break.”

Companies in focus

• Palantir Technologies Inc. shares
  PLTR,
  -0.85%
  was down on Friday after the company announced an extension to a U.S. Army contract.

• Steel Dynamics Inc.’s shares
  STLD,
  +4.97%
  shot higher after the company reported earnings, making it one of the S&P 500’s best performers in Friday trading.

• Costco Wholesale Corp. shares 
  COST,
  +4.65%
  jumped after the company reported fiscal first-quarter earnings and revenue largely in line with expectations after market close on Thursday, and also announced a special dividend of $15 a share.

• JD.com
  JD,
  +5.18%
  was up as fresh stimulus out of China helped boost shares of companies based in the world’s second-largest economy. Alibaba Group Holding Ltd.’s stock
  BABAN,
  +2.98%
  was also higher.

–Barbara Kollmeyer contributed to this report.