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Despite inflation and fears of a recession, markets close out the year on a high

SCOTT SIMON, HOST:

The S&P 500, a stock index that includes 500 of the biggest and best-known companies in the world, is close to hitting an all-time high, which is a surprise, given how much anxiety the public has had about the economy, especially inflation, even though some new data shows that sentiment might be turning around. NPR's David Gura joins us. David, thanks for being with us.

DAVID GURA, BYLINE: Happy to be here, Scott.

SIMON: Let's start with those gains. How well has the stock market done in 2023?

GURA: Incredibly well. You know, what's remarkable about this is where we are today, given how much concern there was at the beginning of the year about a potential recession and how much pessimism there has been among Americans about the economy. Just look at the latest data, including new inflation data we got yesterday, which showed that prices dropped for the first time in more than three years. That's huge, given how much inflation has dominated the conversation we've been having about the economy over the last few years.

So we're in a very different place right now. The economy has continued to improve, and that has led to these record gains. The S&P 500 is up almost 25% this year. The Dow Jones Industrial Average, yes, a smaller index, but with some big names, including Apple and Boeing and JPMorgan Chase, is up more than 12% this year. And the Nasdaq, which includes more tech companies, is up more than 40%. So we have seen a big rally. But, Scott, there is a major caveat here.

SIMON: I knew that was coming somehow. What is the caveat?

GURA: Well, when you dig into these numbers, it turns out that for most of the year, the bulk of the S&P 500's gains were thanks to just a handful of stocks. Bank of America's chief investment strategist, Michael Hartnett, nicknamed those the Magnificent Seven. He told me he's a fan of old Westerns.

MICHAEL HARTNETT: You've got this concentration of winners, you know, within the S&P 500. There's seven of them. They're looking pretty magnificent because of their exposure to AI.

GURA: Of course, that's artificial intelligence, which has been one of the big stories of this last year. A lot of people talking about its potential to disrupt the economy and the world more broadly. Wall Street has channeled its enthusiasm for AI into these seven stocks. Most of these are household names. They're companies that make products I think most of us use - Alphabet, which is Google's parent company, Apple and Amazon. Meta is another one. That's Facebook's parent company - Microsoft. And then there's the carmaker Tesla and Nvidia. That's a company that designs chips for many of the supercomputers that power artificial intelligence. Hartnett told me shares of these seven companies alone are up more than 108% year to date.

SIMON: But, David, is that a problem, the narrowness of this rally?

GURA: You know, it can be a problem, Scott, if only a handful of stocks are driving a rally, because if there's a downturn and a selloff, that would drag down the entire stock market. What you want to see are broader gains. You want to see a broad swath of the economy reflected in the stock market, not just a narrow segment of tech companies. Marc Dizard is the chief investment strategist in the asset management group at PNC, and he told me this rally has to become more inclusive.

MARC DIZARD: We need to see it in some of the industrial-type companies. We need to see it in financials. We need to see it in real estate, health care. So we need to see broader, I'll say, overall sector participation.

GURA: And, Scott, there have been signs that is starting to happen over the last couple of weeks.

SIMON: What kind of signs?

GURA: We saw the start of what's being called an everything rally after the Federal Reserve wrapped up its last meeting of the year. You know, it's been in this fight against high inflation. It's raised interest rates higher than 5%. And this week, there was a market change from policymakers. They sounded a really hopeful note about the economy. They suggested cutting interest rates is now on the table. In their economic projections for the new year, they said they anticipate cutting rates three times. It's something that hasn't happened in years.

And yesterday's inflation data made Wall Street more optimistic that'll happen. We saw prices fall for the first time since April of 2020. We also learned that people are still spending, even though we've seen the cost of borrowing go up so much. That matches what we're seeing in surveys lately, that consumers' confidence in the economy is higher, which is also notable given how much of a disconnect there's been between how good the economic data have been and how people feel about it. So there's new optimism, yes, about the state of the economy and the future of the economy, but also about markets in the new year, that this rally will continue, Scott, and it will keep broadening beyond those Magnificent Seven stocks.

SIMON: "Magnificent Seven" - that's where Yul Brynner plays the cowboy...

GURA: There you go, and Steve McQueen.

SIMON: ...Who dresses all in black, right?

GURA: Exactly. The very same.

SIMON: NPR's David Gura. Thanks so much.

GURA: Thanks, Scott. Transcript provided by NPR, Copyright NPR.

NPR transcripts are created on a rush deadline by an NPR contractor. This text may not be in its final form and may be updated or revised in the future. Accuracy and availability may vary. The authoritative record of NPR’s programming is the audio record.

Scott Simon is one of America's most admired writers and broadcasters. He is the host of Weekend Edition Saturday and is one of the hosts of NPR's morning news podcast Up First. He has reported from all fifty states, five continents, and ten wars, from El Salvador to Sarajevo to Afghanistan and Iraq. His books have chronicled character and characters, in war and peace, sports and art, tragedy and comedy.
David Gura
Based in New York, David Gura is a correspondent on NPR's business desk. His stories are broadcast on NPR's newsmagazines, All Things Considered, Morning Edition and Weekend Edition, and he regularly guest hosts 1A, a co-production of NPR and WAMU.
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