The Dow Jones Industrial Average (DJIA) hit an all-time high, surpassing 47,300 on Friday. This increase came after the US Consumer Price Index (CPI) inflation numbers were lower than expected, raising hopes for possible interest rate cuts by the Federal Reserve. The headline CPI inflation was 3.0% year-over-year in September, slightly below the expected 3.1%. This led traders to anticipate two quarter-point rate cuts by the end of the year. Although inflation is still above the Fed’s 2% target, many believe adjustments are likely.

Probability of Rate Cuts

According to the CME’s FedWatch Tool, there is more than a 95% chance of rate cuts in October and December. The timeframe for the first rate cut in 2026 has shifted to March. PMI results for September were better than expected, with the Services component climbing to 55.2, up from an anticipated 53.5. While business confidence is increasing, consumer sentiment is declining. The University of Michigan Consumer Sentiment Index fell to 53.6, and the 5-year inflation expectations rose to 3.9% from 3.7%. Inflation remains a concern due to supply chain issues. The Fed is focused on maintaining price stability and employment while addressing challenges from the pandemic. With the DJIA reaching record highs above 47,300, the market outlook is very positive. The main driver is the expectation of two Federal Reserve interest rate cuts by the end of the year, with a 95% probability in the futures market. This environment favors strategies that benefit from ongoing growth in stock prices. Given this strong optimism, traders should think about buying call options on major indices like the SPY and DIA, especially those expiring in December 2025, to match the expected rate cuts. This bullish trend is similar to what we saw in late 2023 when the S&P 500 rose nearly 14% in the final two months due to hopes of Fed easing. With the VIX index recently around 13, purchasing these call options is relatively affordable.

Divergence in Market and Consumer Sentiment

However, there is a noticeable gap between the excitement in the markets and the caution among consumers. The drop in the University of Michigan Consumer Sentiment Index, combined with rising consumer inflation expectations at 3.9%, raises concerns. This indicates that while investors are optimistic, many households are still facing challenges with costs, which could affect corporate profits. This gap suggests the need for protective strategies that are currently inexpensive. Buying out-of-the-money put options on indices can act as a low-cost insurance policy against any unexpected actions from the Fed or a sudden dip in economic data. With low volatility, hedging against a market pullback is more affordable than it has been for much of the year. Create your live VT Markets account and start trading now.

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