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Dow Jones and S&P 500 hit record highs as rate cut rally continues

Key points

  • The Dow Jones and S&P 500 hit record highs last week.

  • There were two key economic drivers that extended the post rate cut rally.

  • Attention turns this week to the nonfarm payrolls report on Friday.

The major large cap indexes were up last week, but the Russell 2000 finished the week slightly lower. Will the momentum continue this week?

The major large cap indexes gained for the third straight week, with the Dow Jones and S&P 500 reaching record highs last week.

The Dow Jones gained 0.6% last week to finish at 42,313, an all-time closing high. The S&P 500 hit a record closing high last Thursday at 5,745, but then fell back slightly on Friday to close the week at 5,738 — up 0.6% for the week.

Also, the Nasdaq Composite had the best week, rising 1% to 18,119. It was the third straight week of gains for these indexes, and the second in a row since the Federal Reserve cut interest rates on September 18. However, the Russell 2000 was down slightly, last week, about 0.1% to 2,225. The previous week, when the Fed cut rates, small caps gained 2.1%.

Let’s take a look at what drove the markets last week and what to expect this week.

Inflation drops to 2.2%

There were two big economic events that drove markets higher last week. One was the revised gross domestic product (GDP) report, which showed that the economy grew at a 3% pace, up from previous reports of 2.8% growth. The upward revision was due to higher federal government spending and private inventory investment than originally anticipated.

The second catalyst was the August Personal Consumption Expenditures (PCE) report which showed inflation dropping to 2.2%, down from 2.5% in July. The PCE, which is the Fed’s preferred gauge to track price movements, was better than the 2.3% rate that economists had expected. At 2.2%, the inflation rate is the lowest since February 2021 and is close to the Fed’s target of 2% annual inflation.

Both of these reports were good news for the markets, but the news had largely already been priced in. The PCE drop was similar to the decline in the Consumer Price Index (CPI) a few weeks earlier and, given that the Fed had already cut interest rates, it sparked little movement in the markets. Also, while the GDP revision was positive, the economic growth had mostly been priced in after the initial Q2 GDP came out.

Jobs report this week

The markets were sputtering along on Monday, the last day of the third quarter. As of morning trading, the major indexes were down slightly, with the Dow Jones off 100 points (-0.2%), the Nasdaq down 40 points (-0.2%), and the S&P 500 down 10 points (-0.2%). The Russell 2000 was up roughly 6 points Monday, or 0.3%.

Third quarter earnings season begins next week, but there are a few noteworthy names reporting this week, particularly Nike (NYSE: NKE), which recently replaced its CEO, Paychex (NASDAQ: PAYX), and spice company McCormick (NYSE: MKC) on Tuesday.

Food company Conagra (NYSE: CAG) reports on Wednesday, while Levi Strauss (NYSE: LEVI) goes Wednesday, and food company Constellation Brands (NYSE: STZ) reports Thursday.

More notably, investors will be watching the nonfarm payrolls, or unemployment, report on Friday. With inflation near its target range, the other part of the Fed’s dual mandate, maximum employment, comes into focus. Markets could move on Friday, depending on the results of the nonfarm payrolls report.

Economists are predicting 144,000 new jobs and an unemployment rate of 4.2% in September — same as August.