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The stock market got exactly what it wanted from the Fed

The Fed issued its first interest-rate cut in four years on Wedneday.
Stocks surged Thursday in a delayed reaction after closing slightly lower following the Fed meeting.
Major indexes were trading around record highs Thursday morning.

Stocks rallied sharply on Thursday in a delayed reaction following the Federal Reserve's 50 basis point rate cut, the first cut in over four years.

Major indexes wobbled into the close on Wednesday, turning lower during Fed Chair Jerome Powell's question-and-answer session. However, the market on Thursday was decisively higher as traders digested the central bank's big initial rate cut and its outlook for more to come through the end of this year.

The Dow Jones Industrial Average gained 540 points, while the Nasdaq Composite jumped 2.2%. The S&P 500 rose 1.5% to trade at record highs.

The muted market reaction on Wednesday may have pointed to some surprise among investors that the Fed delivered the bigger cut. Views were split heading into the meeting, with around 60% of investors pricing in the 50 basis point move and 30% seeing a smaller 25 basis point cut.

"The Fed has given the market what it was looking for with the bigger 50-basis point rate cut," Joel Kruger, a market strategist at LMAX Group, said in a statement following the Fed meeting on Wednesday.

The outcome also matched what Morgan Stanley strategists outlined earlier this week as a best-case scenario for stocks: a 50-basis-point cut that didn't spook the market in regard to economic growth.

But perhaps foreshadowing the subsequent move lower during Powell's Q&A, Kruger added:

"Our concern from here will be the market's ability to continue to feel good about buying risk assets on future accommodative Fed gestures now that the accommodation has been priced to this extent."

Stocks have historically reacted well to Fed rate cuts. Since 1971, the first Fed cut after a period of raising interest rates has led to positive returns for investors 100% of the time in the next six months, with an average gain of 13%, according to Fundstrat's Tom Lee.

Going forward, investors will be keyed into new economic-data releases for signs that the Fed's swift rate moves have fended off a recession.

"The data going forward will matter more for markets," Priya Misra, a portfolio manager at JP Morgan Asset Management, wrote following the decision. "All we needed today was for Powell to validate market expectations that the Fed is acknowledging the downside risks to the labor market and responding appropriately."

Wednesday's rate decision was also significant in that it confirmed the central bank had pivoted its primary focus.

"The Fed is more worried about the labor market and less concerned about inflation at this point," Jason Pride, the chief of investment strategy and research at Glenmede, said.