Wall Street Sobers Up After December’s Rally

Wall Street’s longest weekly winning streak in almost 20 years came to an end on Friday, as stock investors’ celebrations over slowing inflation and the potential for cuts to interest rates were replaced with caution over the lingering risks to the economy.

The S&P 500 index ended the week with a loss of 1.5 percent. It was the first weekly drop after nine straight weeks of gains — the market’s longest winning streak since January 2004. The Nasdaq Composite, chock-full of tech stocks that soared in 2023, has also drifted lower.

Analysts and investors said that for the time being the moves signaled only a mild pullback, rather than the start of a more severe downturn. Investors’ unbridled optimism had pushed the S&P 500 almost 14 percent higher in the final two months of the year, to within a whisker of a new high.

Alongside caution that stock market valuations had risen too far too quickly, investors’ newfound sobriety was underpinned by a reassessment of when the Federal Reserve would begin to lower interest rates — cuts that could bolster stock prices, corporate profits and consumer spending. Heading into the end of 2023, investors were betting that rate cuts could start as soon as March.

“The market has got a bit ahead of itself,” Cayla Seder, a macro strategist at State Street, said, noting the risk that the slowdown in inflation could still reverse course. “There was so much optimism going into the end of the year.”

Minutes of the Fed’s last meeting in December, released on Wednesday, confirmed perceptions that the central bank’s stance has shifted, with policymakers acknowledging a slowdown in inflation that probably means an end to further interest rate increases. But the minutes suggested policymakers are intent on keeping rates elevated until they are more confident that inflation is under control, putting pressure on the bets of a rate cut in the coming months. That, in turn, has weighed on stocks.