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Week Ahead: With the Markets Converging (Again) with Fed’s Dots, Is the Interest Rate Adjustment Over?

The US
dollar and interest rates appear to be at an inflection point. Much of the past
several weeks have been about correcting the overshoot that took…



The US dollar and interest rates appear to be at an inflection point. Much of the past several weeks have been about correcting the overshoot that took place in  Q4 23, when the derivatives markets were pricing in nearly seven quarter-point rate cuts by the Federal Reserve this year. US two- and 10-year interest rates set new three-month highs last week. With the help of economic data and comments by Fed officials, the market, as it did a few times last year, has converged to the Federal Reserve. That adjustment seems to have run its course. We look for softer US economic data in the coming weeks, which may help cap US rates. At the same time, the technical condition of many of the G10 currencies has improved and momentum indicators are turning higher. Growth impulses from are still faint in most other high-income countries, but the key, as seen in Q4 23, are the developments in the US. 

Another developing story is in China. Beijing has taken formal and informal steps to support equities. The CSI 300 rose every day last week, as the mainland markets re-opened from the extended holiday. The last time it did that in five-day week was November 2020. In fairness, the CSI 300 rose in the four sessions before the holiday commenced. During the Great Financial Crisis and again during Covid, many high-income countries moved to support their stock markets and limited short sales. Many see the threat to financial stability posed by dramatic losses in the equity market to be part of the so-called "Fed put."  It may be even more significant in China where the property market has shuttered a key savings vehicle and central government bond yields are too low. Weak stocks encouraged Chinese investors to export savings to the extent possible and purchase gold. Foreign investors, using the Hong Kong Connect were also active buyers in recent days, perhaps as the "fear of missing out" kicks-in. 

Another theme that we think is already emerged with Canada's January CPI last week and will be extended to the preliminary estimate of the eurozone's February CPI this week, is a sharp deceleration of inflation. The eurozone, UK, and Canada saw dramatic jumps in consumer prices in the Feb-May 2023 period. As these drop out of the year-over-year measure, headline rates will fall more than many may appreciate. Eurozone and UK inflation likely to slow below 2%, assuming a conservative average monthly gain of 0.3%. With the same assumption, Canada's headline CPI may hold slightly above 2%.

United States: The January CPI and PPI reports saw market expectations again move closer to the Fed's December dot plot, which anticipated that three rate cuts this year would be appropriate. Fed Chair Powell has warned that as the quarter progresses, the snapshot of views offered by the Summary of Economic Projections (dot plot) may become dated, but thus far, most of the Fed officials who have spoken do not appear to have changed their minds. At the end of last week, the Fed funds futures show three rates’ cuts are now discounted and less than a 30% chance of a fourth cut. This is about half of the easing that was discounted late last year. 

Among market participants, there seems to be two key issues. The first is about the strength of the economy here at the start of Q1 24. January jobs growth appeared solid, but retail sales and industrial output were weaker than expected. While all business cycles are unique, during this one, many standard metrics do not seem to be working, including yield-curve inversion, the contraction in M2, and the collapse of leading economic indicators, to name a few. On balance, with the data in hand, we suspect the economy is growing faster than the Fed's long-term non-inflationary pace of 1.8%. But is slowing and we expect this to be more evident with this month's data. Weak Boeing orders will weigh on durable goods orders and the early call for nonfarm payrolls is less than half of January's 353k increase (March 8). The second issue is inflation. The personal consumption deflator, which the Fed targets, has a different methodology and assigns different weights than the CPI. The PCE deflator rose at an annualized rate of 2% in H2 23, while the core measure rose by 1.8%. A 0.3% increase in January would allow the year-over-year rate to ease to 2.3% from 2.6%, given the 0.6% rise in January 2023. The core rate may rise by 0.4%, which would see the year-over-year rate slip to 2.8% from 2.9%. 

The Dollar Index peaked with the release of the January CPI on February 13 near 105.00, overshooting the (61.8%) retracement of the losses from Q4 23 decline. It has fallen in seven of the eight sessions since peak. A break now of the 103.30 area could signal a test on 102.80 initially and then 102.30. The five-day moving average crossed below the 20-day moving average at the end of last week for the first time since early January. The momentum indicators have turned lower.

China:  China reports February PMI and the Caixin manufacturing PMI in the coming days. Many western economists argue that the China's developmental model has failed. As we have noted before, Nobel prize-winning economy Paul Krugman argued before Xi's claim to life-time rule, Beijing's "wolf diplomacy, and harassment of its neighbors, and the unwinding of economic and political reforms since the death of Mao, that Chinese model hit a "great wall." Many of the architects of Trump's tariffs, which have been continued and extended by the Biden administration, cut their teeth on confronting Japan in the 1980s. We have suggested China was on a path set into place by Deng Xiaoping and Xi has taken China off that path. The idea of "peaceful rise" or "peaceful development," which minimized the friction with the US has been replaced by that notion that "you can't hide an elephant behind a tree." What makes the current situation exceptionally fraught with risk is that Beijing seems to think that US is in some inexorable decline. In this sense both sides conclude the other is in decline and that would seem to boost the risk of underestimating one's adversary. Beijing is not content with the current pace and composition of growth and regardless of the latest PMI print, we expect additional stimulus. Last week, it moved to deter institutional investors from selling at the open or close and put a stigma on selling short. In the Great Financial Crisis and during Covid, some market economies banned short selling in some sectors. That ought not be the issue. However, China's approach seems clumsier and less transparent.

Through formal and informal mechanisms, Beijing appears to have put a floor under Chinese stocks. The CSI 300 has strung together back-to-back weekly gains for the first time in three months. It rose 3.7% last week after rallying 5.8% in the week before the Lunar New Year holiday. It is now higher on the year. This may take some pressure off the yuan. However, the continued weakness of the Japanese yen warns that the CNY7.20 area that has capped the dollar last month and this month could come under further pressure. Assuming the fix continues to be steady, the dollar could rise toward CNY7.24, though we suspect it won't.

Eurozone: Starting with the preliminary CPI on March 1, headline inflation is set to fall sharply in the EMU. This will likely encourage speculation that the ECB can cut rates sooner, especially in the context of the recent cuts in the growth outlook. In February-April 2023, eurozone CPI rose at an annualized rate of 9.2%. With a conservative assumption of an average monthly increase of 0.3% in the February-April period this year, the headline rate will fall below 2%. It will likely be near 2% by the time the ECB meets on April 11. The core rate is firmer at 3.3% year-over-year in January. It was at 5.5% as recently at the middle of last year. The swaps market has about a 33% chance of a cut in April discounted. It had been fully discounted as recently as the end of January. For the first two weeks of the year, the US two-year rate rose less than Germany's and the US premium over Germany narrowed to about 155 bp from about 190 bp at the end of 2023. It has since recovered fully and approached 190 bp in mid-February. Eurostat will also report the region's January unemployment rate. It seems like an underappreciated story. The eurozone has withstood not only the ECB's tightening but also a stagnant or worse economy without a pick-up in the unemployment rate, which finished last year at 6.4%. Before the pandemic struck, the unemployment rate was at 7.5%, which was lowest since 2008. It reached the EMU-area low of 7.4% in late 2007. It has not been above there since July 2021. 

The euro spiked to three-week high in Asia on February 22 near $1.0890 but European and North American participants sold it back to almost $1.08. Still, the technical tone is solidifying with the momentum indicators turning up and the five-day moving average crossing above the 20-day moving average for the first time since early January. The euro recorded its first weekly advance in six weeks. We suspect the $1.0900-20 area needs to be surpassed to signify something more than broad consolidation after falling by about 4.5-cents since late last year. A close below the $1.0790-$1.0800 suggests that forging the low will take more time.

Japan:  The signal from the January CPI has already been given by the Tokyo estimate several weeks ago. That signal is of disinflationary forces. Due primarily to different weights, the Tokyo CPI is running a couple of tenths of a percent below the national figures. The January Tokyo headline and core CPI tumbled to 1.6% from 2.4% and 2.1%, respectively. In December, the national CPI was 2.6% and the core was 2.3%. Both may have slipped below 2% last month. This, like recent news that showed the Japanese economy unexpectedly contracted in Q4 23, could be seen as hampering what had been expected to be the BOJ's exit from the negative policy rate. We have argued that rather than an economic issue, the BOJ appears to be approaching it as a technocratic issue. Negative interest rates making it more difficult to conduct monetary policy. While the knee-jerk market reaction may disagree, we do not think the sharp drop in January industrial production will change the BOJ's drive either. The earthquake in early January was a significant disruption.  

Japan also reports retail sales. Japanese consumption on a GDP basis contracted for three consecutive quarters through the end of last year. Consumer spending fell by 0.9% at an annualized rate it Q4 23, which was the least of the three quarters, even though retails fell by an average of 1.1% a month, the most in the early days of Covid. Still, a poor retail sales report could contribute to the negative sentiment after having been surprised by the Q4 23 economic contraction. While consumption in Q4 23 was weak, production was strong. Industrial output rose by an average of 0.6% in Q4 23, the strongest quarterly performance in two years. The January report estimate is due on February 29. At the same time, Japan will report January employment figures. The unemployment rate finished last year at three-year low of 2.4%, despite the back-to-back quarterly contractions. Before the pandemic, at the end of 2019, it was 2.2%.

US yields rose to new highs for the year last week and the dollar closed higher last week, as it has done every week so far this year.  As we have noted, implied three-month vol is near a two-year low (~8%). Still, the market looks orderly, and with negative policy rate, Japan probably does not get a sympathetic hearing from its counterparts for material intervention. Nevertheless, the market may turn cautious as the JPY152 area is approached. That capped the greenback in 2022 and 2023. Not to lean too far ahead of our skis, but we look for softer data, including US February jobs data that will help cap US rates and take some pressure off the yen. 

United Kingdom: February Nationwide house price index and January consumer credit and mortgage lending is the not the stuff that typically moves sterling. The UK holds its third by-election of the month in Rochdale. The Labour MP passed and hence the byelection. However, what makes it interesting is that both Labour and the Greens have distanced themselves from their respective candidates for comments about the Middle East. Meanwhile a former Labour MP (2010) who was suspended from the party in 2017 (explicit emails to a 17-year-old girl) is running as the Reform Party candidate (led by Nigel Farage). The UK holds local elections in May and a national election is expected to be call later this year. 

Sterling rose last week for the first time since mid-January and its nearly 0.55% gain was the most since mid-December. The weekly settlement was the highest since January 26.  The momentum indicators have turned up and the five-day moving average pushed above the 20-day moving average for the first time since early January. Sterling has recovered from the breakdown to around $1.2520 earlier this month and it has returned to the middle of the $1.26-$1.28 trading range that dominated from mid-December through early February. The $1.2750-$1.2800 area offers what appears to be formidable resistance. 

Australia: The Antipodeans are seen as among the laggards in upcoming easing cycle, ex-Japan. Indeed, the swaps market continues to price odds of another rate hike by the Reserve Bank of New Zealand with around a 60% chance by the end of May, the last meeting of H1 24. That said, the swap market has a cut fully discounted (-90%) by the end of November. The futures market shows a clear easing bias for the Reserve Bank of Australia but does not have the first cut fully discounted until September (though there is around an 85% chance of a cut in August). Australia's month's CPI measure (as opposed to the traditional quarterly report) has fallen from 8.4% at the end of 2022 to 3.4% at the end of last year. The Q4 23 CPI fell to 4.1% from 5.4% in Q3 23. The RBA forecast CPI to fall to 3.2% this year. A faster than expected decline in inflation could spur speculation of an earlier rate cut, but the market, like policymakers, seem to put more stock on the quarterly measures. Australia will also report January retail sales. They were dreadful in January, falling 2.7% month-over-month. This overstates the weakness of the Aussie consumer after the recent rate hikes (last one was in November 2023). 

The Australian dollar has strung together three consecutive weekly gains after falling for first five weeks of the year. It posted its highest settlement since February 1 ahead of the weekend. It will begin the week with an eight-day rally in tow. The five-day moving average crossed above the 20-day moving average for the first time since early January and the momentum indicators are trending higher. The $0.6600-$0.6625 area posted the next technical hurdle. On the downside, a break of the $6520 area would be disappointing. 

Canada: Canada is among the last of the G10 countries to estimate Q4 23 GDP. The December monthly and fourth-quarter GDP will be reported on February 29. The economy contracted by 1.1% in Q3 23 but likely returned to growth in Q4. The economy may have grown by around 0.2% in December after expanding by 0.2% in November, which ended a three-month stagnation. The median forecast in Blomberg's month survey is for 0.3% in each of the first two quarters this year. The swaps market has about a 75% chance of a June cut. It was completely discounted at the start of the month. 

The US dollar traced a range on February 13, the day the January CPI was reported, against the Canadian dollar that has remained intact since then: roughly CAD1.3440-CAD1.3585. Another way to think of the range is that it is between the 50- and 100-day moving averages (~CAD1.3410-CAD1.3540).The 200-day moving is in the middle of the range The Canadian dollar continues to be sensitive to the general risk environment. The rolling 30-day correlation of changes in the exchange rate and the S&P 500 is around 0.56, the upper end of where is has been over the past year.  

Mexico:  The economic diary is jammed in the coming days: January trade figures, the central bank's new inflation report, unemployment, and worker remittances. Also manufacturing PMI and IMEF February surveys are due. However, the data are unlikely to change the impression that the Mexican economy is slowing down. The central bank has already signaled that it is preparing the first rate cut. Even with a quarter-point cut that may be delivered as soon as next month, Mexico's rates are attractive. Its external account is solid. Last year, for example, Mexico recorded an average monthly trade deficit of $455 mln (vs. an average monthly deficit of $2.2 bln in 2022). Worker remittances averaged nearly $5.3 bln in 2023 (~$4.9 bln average in 2022).

Since mid-January, the US dollar has recorded lower highs and found support near MXN17.00. We continue to detect a change in sentiment toward the peso. A down trendline off the late January high and early February high comes in near MXN17.1170 at the start of the new week and falls to about MXN17.07 by the end of the week. This month, the greenback has not closed outside of the MXN17.03-MXN17.20 range. Our bias is toward an upside break as overweight positions are trimmed. In the futures market, speculators have the largest net long peso since early 2020. Three-month implied volatility has fallen below 9% for the first time since before the pandemic.




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Comments on February Employment Report

The headline jobs number in the February employment report was above expectations; however, December and January payrolls were revised down by 167,000 combined.   The participation rate was unchanged, the employment population ratio decreased, and the …



The headline jobs number in the February employment report was above expectations; however, December and January payrolls were revised down by 167,000 combined.   The participation rate was unchanged, the employment population ratio decreased, and the unemployment rate was increased to 3.9%.

Leisure and hospitality gained 58 thousand jobs in February.  At the beginning of the pandemic, in March and April of 2020, leisure and hospitality lost 8.2 million jobs, and are now down 17 thousand jobs since February 2020.  So, leisure and hospitality has now essentially added back all of the jobs lost in March and April 2020. 

Construction employment increased 23 thousand and is now 547 thousand above the pre-pandemic level. 

Manufacturing employment decreased 4 thousand jobs and is now 184 thousand above the pre-pandemic level.

Prime (25 to 54 Years Old) Participation

Since the overall participation rate is impacted by both cyclical (recession) and demographic (aging population, younger people staying in school) reasons, here is the employment-population ratio for the key working age group: 25 to 54 years old.

The 25 to 54 years old participation rate increased in February to 83.5% from 83.3% in January, and the 25 to 54 employment population ratio increased to 80.7% from 80.6% the previous month.

Both are above pre-pandemic levels.

Average Hourly Wages

WagesThe graph shows the nominal year-over-year change in "Average Hourly Earnings" for all private employees from the Current Employment Statistics (CES).  

There was a huge increase at the beginning of the pandemic as lower paid employees were let go, and then the pandemic related spike reversed a year later.

Wage growth has trended down after peaking at 5.9% YoY in March 2022 and was at 4.3% YoY in February.   

Part Time for Economic Reasons

Part Time WorkersFrom the BLS report:
"The number of people employed part time for economic reasons, at 4.4 million, changed little in February. These individuals, who would have preferred full-time employment, were working part time because their hours had been reduced or they were unable to find full-time jobs."
The number of persons working part time for economic reasons decreased in February to 4.36 million from 4.42 million in February. This is slightly above pre-pandemic levels.

These workers are included in the alternate measure of labor underutilization (U-6) that increased to 7.3% from 7.2% in the previous month. This is down from the record high in April 2020 of 23.0% and up from the lowest level on record (seasonally adjusted) in December 2022 (6.5%). (This series started in 1994). This measure is above the 7.0% level in February 2020 (pre-pandemic).

Unemployed over 26 Weeks

Unemployed Over 26 WeeksThis graph shows the number of workers unemployed for 27 weeks or more.

According to the BLS, there are 1.203 million workers who have been unemployed for more than 26 weeks and still want a job, down from 1.277 million the previous month.

This is down from post-pandemic high of 4.174 million, and up from the recent low of 1.050 million.

This is close to pre-pandemic levels.

Job Streak

Through February 2024, the employment report indicated positive job growth for 38 consecutive months, putting the current streak in 5th place of the longest job streaks in US history (since 1939).

Headline Jobs, Top 10 Streaks
Year EndedStreak, Months
6 tie194333
6 tie198633
6 tie200033
1Currrent Streak


The headline monthly jobs number was above consensus expectations; however, December and January payrolls were revised down by 167,000 combined.  The participation rate was unchanged, the employment population ratio decreased, and the unemployment rate was increased to 3.9%.  Another solid report.

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Immune cells can adapt to invading pathogens, deciding whether to fight now or prepare for the next battle

When faced with a threat, T cells have the decision-making flexibility to both clear out the pathogen now and ready themselves for a future encounter.

Understanding the flexibility of T cell memory can lead to improved vaccines and immunotherapies. Juan Gaertner/Science Photo Library via Getty Images

How does your immune system decide between fighting invading pathogens now or preparing to fight them in the future? Turns out, it can change its mind.

Every person has 10 million to 100 million unique T cells that have a critical job in the immune system: patrolling the body for invading pathogens or cancerous cells to eliminate. Each of these T cells has a unique receptor that allows it to recognize foreign proteins on the surface of infected or cancerous cells. When the right T cell encounters the right protein, it rapidly forms many copies of itself to destroy the offending pathogen.

Diagram depicting a helper T cell differentiating into either a memory T cell or an effector T cell after exposure to an antigen
T cells can differentiate into different subtypes of cells after coming into contact with an antigen. Anatomy & Physiology/SBCCOE, CC BY-NC-SA

Importantly, this process of proliferation gives rise to both short-lived effector T cells that shut down the immediate pathogen attack and long-lived memory T cells that provide protection against future attacks. But how do T cells decide whether to form cells that kill pathogens now or protect against future infections?

We are a team of bioengineers studying how immune cells mature. In our recently published research, we found that having multiple pathways to decide whether to kill pathogens now or prepare for future invaders boosts the immune system’s ability to effectively respond to different types of challenges.

Fight or remember?

To understand when and how T cells decide to become effector cells that kill pathogens or memory cells that prepare for future infections, we took movies of T cells dividing in response to a stimulus mimicking an encounter with a pathogen.

Specifically, we tracked the activity of a gene called T cell factor 1, or TCF1. This gene is essential for the longevity of memory cells. We found that stochastic, or probabilistic, silencing of the TCF1 gene when cells confront invading pathogens and inflammation drives an early decision between whether T cells become effector or memory cells. Exposure to higher levels of pathogens or inflammation increases the probability of forming effector cells.

Surprisingly, though, we found that some effector cells that had turned off TCF1 early on were able to turn it back on after clearing the pathogen, later becoming memory cells.

Through mathematical modeling, we determined that this flexibility in decision making among memory T cells is critical to generating the right number of cells that respond immediately and cells that prepare for the future, appropriate to the severity of the infection.

Understanding immune memory

The proper formation of persistent, long-lived T cell memory is critical to a person’s ability to fend off diseases ranging from the common cold to COVID-19 to cancer.

From a social and cognitive science perspective, flexibility allows people to adapt and respond optimally to uncertain and dynamic environments. Similarly, for immune cells responding to a pathogen, flexibility in decision making around whether to become memory cells may enable greater responsiveness to an evolving immune challenge.

Memory cells can be subclassified into different types with distinct features and roles in protective immunity. It’s possible that the pathway where memory cells diverge from effector cells early on and the pathway where memory cells form from effector cells later on give rise to particular subtypes of memory cells.

Our study focuses on T cell memory in the context of acute infections the immune system can successfully clear in days, such as cold, the flu or food poisoning. In contrast, chronic conditions such as HIV and cancer require persistent immune responses; long-lived, memory-like cells are critical for this persistence. Our team is investigating whether flexible memory decision making also applies to chronic conditions and whether we can leverage that flexibility to improve cancer immunotherapy.

Resolving uncertainty surrounding how and when memory cells form could help improve vaccine design and therapies that boost the immune system’s ability to provide long-term protection against diverse infectious diseases.

Kathleen Abadie was funded by a NSF (National Science Foundation) Graduate Research Fellowships. She performed this research in affiliation with the University of Washington Department of Bioengineering.

Elisa Clark performed her research in affiliation with the University of Washington (UW) Department of Bioengineering and was funded by a National Science Foundation Graduate Research Fellowship (NSF-GRFP) and by a predoctoral fellowship through the UW Institute for Stem Cell and Regenerative Medicine (ISCRM).

Hao Yuan Kueh receives funding from the National Institutes of Health.

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Stock indexes are breaking records and crossing milestones – making many investors feel wealthier

The S&P 500 topped 5,000 on Feb. 9, 2024, for the first time. The Dow Jones Industrial Average will probably hit a new big round number soon t…




Major stock indexes were hitting or nearing records in February 2024, as they were in early 2020 when this TV chyron appeared. AP Photo/Richard Drew

The S&P 500 stock index topped 5,000 for the first time on Feb. 9, 2024, exciting some investors and garnering a flurry of media coverage. The Conversation asked Alexander Kurov, a financial markets scholar, to explain what stock indexes are and to say whether this kind of milestone is a big deal or not.

What are stock indexes?

Stock indexes measure the performance of a group of stocks. When prices rise or fall overall for the shares of those companies, so do stock indexes. The number of stocks in those baskets varies, as does the system for how this mix of shares gets updated.

The Dow Jones Industrial Average, also known as the Dow, includes shares in the 30 U.S. companies with the largest market capitalization – meaning the total value of all the stock belonging to shareholders. That list currently spans companies from Apple to Walt Disney Co.

The S&P 500 tracks shares in 500 of the largest U.S. publicly traded companies.

The Nasdaq composite tracks performance of more than 2,500 stocks listed on the Nasdaq stock exchange.

The DJIA, launched on May 26, 1896, is the oldest of these three popular indexes, and it was one of the first established.

Two enterprising journalists, Charles H. Dow and Edward Jones, had created a different index tied to the railroad industry a dozen years earlier. Most of the 12 stocks the DJIA originally included wouldn’t ring many bells today, such as Chicago Gas and National Lead. But one company that only got booted in 2018 had stayed on the list for 120 years: General Electric.

The S&P 500 index was introduced in 1957 because many investors wanted an option that was more representative of the overall U.S. stock market. The Nasdaq composite was launched in 1971.

You can buy shares in an index fund that mirrors a particular index. This approach can diversify your investments and make them less prone to big losses.

Index funds, which have only existed since Vanguard Group founder John Bogle launched the first one in 1976, now hold trillions of dollars .

Why are there so many?

There are hundreds of stock indexes in the world, but only about 50 major ones.

Most of them, including the Nasdaq composite and the S&P 500, are value-weighted. That means stocks with larger market values account for a larger share of the index’s performance.

In addition to these broad-based indexes, there are many less prominent ones. Many of those emphasize a niche by tracking stocks of companies in specific industries like energy or finance.

Do these milestones matter?

Stock prices move constantly in response to corporate, economic and political news, as well as changes in investor psychology. Because company profits will typically grow gradually over time, the market usually fluctuates in the short term, while increasing in value over the long term.

The DJIA first reached 1,000 in November 1972, and it crossed the 10,000 mark on March 29, 1999. On Jan. 22, 2024, it surpassed 38,000 for the first time. Investors and the media will treat the new record set when it gets to another round number – 40,000 – as a milestone.

The S&P 500 index had never hit 5,000 before. But it had already been breaking records for several weeks.

Because there’s a lot of randomness in financial markets, the significance of round-number milestones is mostly psychological. There is no evidence they portend any further gains.

For example, the Nasdaq composite first hit 5,000 on March 10, 2000, at the end of the dot-com bubble.

The index then plunged by almost 80% by October 2002. It took 15 years – until March 3, 2015 – for it return to 5,000.

By mid-February 2024, the Nasdaq composite was nearing its prior record high of 16,057 set on Nov. 19, 2021.

Index milestones matter to the extent they pique investors’ attention and boost market sentiment.

Investors afflicted with a fear of missing out may then invest more in stocks, pushing stock prices to new highs. Chasing after stock trends may destabilize markets by moving prices away from their underlying values.

When a stock index passes a new milestone, investors become more aware of their growing portfolios. Feeling richer can lead them to spend more.

This is called the wealth effect. Many economists believe that the consumption boost that arises in response to a buoyant stock market can make the economy stronger.

Is there a best stock index to follow?

Not really. They all measure somewhat different things and have their own quirks.

For example, the S&P 500 tracks many different industries. However, because it is value-weighted, it’s heavily influenced by only seven stocks with very large market values.

Known as the “Magnificent Seven,” shares in Amazon, Apple, Alphabet, Meta, Microsoft, Nvidia and Tesla now account for over one-fourth of the S&P 500’s value. Nearly all are in the tech sector, and they played a big role in pushing the S&P across the 5,000 mark.

This makes the index more concentrated on a single sector than it appears.

But if you check out several stock indexes rather than just one, you’ll get a good sense of how the market is doing. If they’re all rising quickly or breaking records, that’s a clear sign that the market as a whole is gaining.

Sometimes the smartest thing is to not pay too much attention to any of them.

For example, after hitting record highs on Feb. 19, 2020, the S&P 500 plunged by 34% in just 23 trading days due to concerns about what COVID-19 would do to the economy. But the market rebounded, with stock indexes hitting new milestones and notching new highs by the end of that year.

Panicking in response to short-term market swings would have made investors more likely to sell off their investments in too big a hurry – a move they might have later regretted. This is why I believe advice from the immensely successful investor and fan of stock index funds Warren Buffett is worth heeding.

Buffett, whose stock-selecting prowess has made him one of the world’s 10 richest people, likes to say “Don’t watch the market closely.”

If you’re reading this because stock prices are falling and you’re wondering if you should be worried about that, consider something else Buffett has said: “The light can at any time go from green to red without pausing at yellow.”

And the opposite is true as well.

Alexander Kurov does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.

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