TSX hits 18-month high

U.S. and Canadian stocks ended firmer on Thursday, with the Dow Jones Industrial Average notching its second straight record-high close, lifted by optimism that borrowing rates will decrease next year following a dovish pivot by the Federal Reserve.

Interest-rate-sensitive banking stocks rallied in Toronto on bets that an expected drop in borrowing costs next year would boost credit growth and revive the housing market.

Investors were closely watching U.S. 10-year Treasury yields, which broke below 4 per cent for the first time since early August in the wake of the Fed statement. They fell further on Thursday, to 3.9 per cent. Canadian bond yields were also lower across the curve, with the closely watched five-year yield down six basis points to its lowest since May.

The U.S. Federal Reserve’s guidance on Wednesday that borrowing costs are expected to come down next year has turned the market sentiment globally, with investors piling into beaten down stocks.

“With major economic data and central bank decisions now behind us, the path is clear for the market through year-end. We’re now entering the Santa Claus Rally – a bullish seasonal period driven by investor optimism and higher stock prices. The market is now carrying significant momentum,” said Brandon Michael, senior investment analyst at ABC Funds.

Not everyone is as upbeat. “The market by any measure and any metric is overbought and has been overbought, and a consolidation or a pause has been expected, especially after yesterday’s surge,” said Quincy Krosby, chief global strategist at LPL Financial in Charlotte, N.C.

“While the market celebrates lower rates, it can question why yields are below 4 per cent” as investors weigh the economic outlook, she added.

U.S. retail sales unexpectedly rose in November as the holiday shopping season got off to a brisk start, the Commerce Department reported on Thursday, further alleviating fears of a recession.

On Friday, the Bank of Canada Governor Tiff Macklem is expected to deliver his final speech of the year, and investors will wait for clues for rate cuts in Canada.

Canada’s housing market slowed further in November, with higher interest rates denting demand, data from the Canadian Real Estate Association showed Thursday. But CREA also noted that expectations of lower interest rates are expected to make the spring market more active.

The S&P/TSX Composite Index rose 149.35 points, or 0.72 per cent, at 20,778.80, its highest close since June 8, 2022.

The rate-sensitive financial sub-index gained 1.2 per cent.

Energy led gains, rising 1.6 per cent on higher crude oil prices, while the materials sector, which houses Canada’s major mining firms, jumped 1.2 per cent as prices of most base and precious metals rallied.

The S&P 500 climbed 0.26 per cent to end at 4,719.55 points.