Jerome Powell knows that his job is not one that draws much applause. Normally, the Federal Reserve chairman is the bearer of bad news, such as: inflation is too high and the Fed is going to end it.
But his speech on Friday in Jackson Hole, Wyoming, generated plenty of cheers on Wall Street for the Fed chairman, and elsewhere as well. Just as important, the speech triggered a huge rally in stocks that made many lesser stocks suddenly look like stars.
The results of the major indexes do not tell the whole story. The S&P 500, the Nasdaq Composite and the Dow Jones Industrial Average each rose more than 1.1%. The Dow and the S&P ended the day just below their record closes of mid-July.
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But the real picture was bigger:
- The Russell 2000 index, ridiculed for much of the year, rose 3.2%.
- The NYSE Arca Airline Index, whose members struggle with swings in oil prices and are regularly hit by hostile economic winds, rose 3.74%.
- The Philadelphia real estate index rose 3.73%.
- All 11 S&P 500 sectors ended the day higher, led by the real estate sector, which rose 2% on the day.
- Interest rates fell as bond prices rose. The 10-year Treasury yield fell to 3.80%, just above its 52-week low of 3.67% on Aug. 5 but below the nearly 5% hit in October.
- Data from Barchart.com showed that 335 stocks hit 52-week highs on Friday, compared with just 53 stocks that hit 52-week lows.
And all because Jerome Powell told an assembly of central bankers from around the world — and a national television audience — “The time has come to tighten policy. The direction of travel is clear.”
Cuts are coming
Rate cuts will likely be officially approved at the Federal Reserve's meeting on September 17-18. The first cut will likely be a quarter of a percentage point.
The Fed's key rate, from 5.25% to 5.5%, would fall to 5% to 5.25%. But Powell strongly hinted at more rate cuts to come. The Fed, the chairman said, does not “seek or welcome a further cooling of labor market conditions.”
Powell's speech has created a propitious moment for many investments.
Lower interest rates mean the cost of capital to start a business, build a new factory or buy a home will be less onerous. The interest rate on 30-year mortgages fell below 6.5% on Friday.
But rates can come down, prompting more buying and selling. The key is for 30-year mortgage rates to fall below 6%, real estate professionals said Friday. That's a level they believe will prompt more homeowners to put their properties up for sale.
Real estate-related stocks and ETFs rose. Redfin (RDFN) The online real estate brokerage rose 18.9% to $11.08. Rival Zillow Group (EITHER) rose 5.2% to $56.35.
More economic analysis:
- Kamala Harris sees the stars of the markets align against Donald Trump
- CPI report contradicts bets on a sharp Fed rate cut
- Main Street business owners push back against Wall Street's doom and gloom over recession
If there is higher sales volume, both companies will benefit, though don't expect Zillow to return to its all-time closing high of $199.90 anytime soon. That peak was reached during the Covid-19 pandemic, when meme stocks took over the stock market.
A big winner: housing
The SPDR S&P Homebuilders ETF (XHB) which invests primarily in home builders and building materials suppliers such as Home Depot (High definition) Lowe's Companies (LOW) and Johnson Controls (JCI) rose 4.3% on Friday. The ETF is up 24.6% this year.
That's better than the Dow (up 9.3%), the S&P 500 (up 18.1%) and the Nasdaq (up 19.1%). Falling rates should help the bottom line of the ETF's 35 components.
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Investors are pushing up shares of two major cruise lines and Norwegian Cruise Line Holdings (NCLH) and Carnival Cruise Line (CCL) Norwegian rose 7.76% to $17.50, while Carnival rose 7.5% to $16.61.
The reason: Lower interest rates will reduce the interest costs they pay on loans to buy ships and finance other activities.
In its fiscal year 2023 (which ended in November), Carnival said it paid $2.07 billion in interest. The company had $31.34 billion in debt due between 2024 and 2031.
In this way, the reduction in interest costs is reflected in the bottom line and increases earnings per share and stock prices.
Assuming inflation stays under control, as it did for most years between 2000 and 2020, that's what investors can expect. For the record, the annual increase in the consumer price index averaged 2.15% between 2001 and 2021, according to Data from the Federal Reserve Bank of St. Louis.
Related: Fed Chair Powell points the way for interest rate cuts