The Fed effect

  • Market embraced Wednesday’s Fed announcement
  • VIX at lowest levels in nearly three years
  • Solar stocks shine on interest rate outlook

The US stock market’s rally after the Federal Reserve signaled its willingness to cut interest rates next year was just another exclamation point on the upswing that has unfolded since the market fell to multi-month lows in late October.

The S&P 500 (SPX) closed up more than 1% on Wednesday after the Fed’s announcement, and is up nearly 15% since October 27. The Dow Jones Industrial Average (DJIA) hit new all-time highs on Wednesday and Thursday.

But as robust as the stock market’s nearly seven-week rally has been, the Cboe Volatility Index’s (VIX) descent has been even more dramatic. The VIX, which closed above 21 on October 20 and traded above 23 on October 23, fell to 11.81 Tuesday—its lowest low since January 2020—and hasn’t moved much above it since:

Chart 1: Cboe Volatility Index (VIX), 10/20/23–12/15/23. Lowest VIX in nearly three years.

Source: Power E*TRADE. (For illustrative purposes. Not a recommendation.)

Also, while bulls embraced the Fed’s dovish pivot on Wednesday, they latched on to some stocks more than others. The rallies in some solar and green energy stocks were especially strong. Because these companies often rely on borrowing to finance operations, many of their stocks fell significantly as interest rates climbed over the past two years or so.

For example, Sunrun (RUN), which in late October closed 85% below its November 2021 highs, rallied 19.7% on Wednesday and gained as much as 24% intraday on Thursday:

Chart 2: Sunrun (RUN), 10/19/23–12/14/23. Post-Fed surge.

Source: Power E*TRADE. (For illustrative purposes. Not a recommendation.)

The move was similar to the one that occurred in mid-November after lower-than-expected inflation data fueled hopes the Fed would pivot to rate cuts sooner rather than later.

Whether these moves are sustainable is another matter. As noted in “Market sustains festive mood,” the SPX was, more often than not, lower one month after the VIX spent more time than usual hugging a long-term low. Then again, that observation was initially made in early December, and the market has yet to show signs of exhaustion.

The markets may look much different than they did a few weeks ago, but the adage that “big moves are sometimes susceptible to big setbacks,” is worth keeping in mind. The market may move your way in the long run, but that doesn’t mean there won’t be some bumps in the road.

Today’s numbers include (all times ET): Empire State Manufacturing Index (8:30 a.m.), Industrial Production (9:15 a.m.), PMI Composite Flash (9:45 a.m.).

Today’s earnings include: Darden Restaurants (DRI).


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