We have some big ASX 200 news to report this Wednesday. The S&P/ASX 200 Index (ASX: XJO) has just hit a new all-time high.
Aussie shares had been threatening to crack the record set in August 2021 for the past week or so. Yesterday saw the ASX 200 Index get tantalisingly close to cracking its previous high watermark, getting within three points of the record at one stage.
But investors have blown through yesterday's high of 7,630.5 points with ease during today's session. The ASX 200's previous 2021 record high was 7,632.8 points. But just after 1 pm today, the ASX 200 climbed up to 7,643.5 points – its new reigning record high.
Today's gains put the ASX 200 Index up 0.2% year to date in 2024, as well as up 2.23% over the past 12 months. However, the Aussie share market is also up a far more impressive 12.8% since the end of October 2023.
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Why is the ASX 200 Index clocking record highs today?
Yesterday, we discussed a few reasons why investors have flooded back into ASX 200 shares over the past few months, pushing up the index to where it is today. Amongst the factors we discussed were falling inflation amid a strong economy with low unemployment, an expectation of lower interest rates by the end of the year, and a surging American stock market.
Well, it seems that the first two factors are what's likely to have helped push ASX 200 investors over the top today.
Earlier this morning, my Fool colleague Bernd discussed the latest inflation statistics for the Australian economy. They were released by the Australian Bureau of Statistics (ABS) earlier today. He also went into the implications for the ASX 200 Index.
As discussed, commentators were expecting inflation to come in at an annualised 4.3%. Instead, inflation in the 12 months to 31 December dropped to 4.1%. My colleague astutely noted that this is "a massive improvement on the blistering 7.8% peak annual CPI levels reported in December 2023".
So we have Australian inflation running at 4.1%. And yet the Reserve Bank of Australia (RBA)'s cash rate is still sitting at 4.35%. So you can see where we're going next.
Falling inflation key to new ASX highs
This latest data will arguably give the RBA a strong incentive to make sure the next interest rate move is a cut, rather than a hike. If the RBA keeps the cash rate above the level of inflation for a prolonged period, it could increase the risk of a recession.
As such, it appears investors are rapidly bringing forward their expectations for a rate cut today in light of this latest data. Interest rates were once described by legendary investor Warren Buffett as the 'gravity' of the financial world. The higher they are, the more they pull every asset's valuation down. And that includes ASX 200 shares.
There's little doubt that the stagnation that the ASX 200 Index went through between August 2021 and August 2023 was at least partially due to the massive rate hiking spree the RBA went on during this period. But now investors are pencilling in rate cuts, and sooner rather than later, it's no surprise to see investors enthusiastically flocking back into ASX 200 shares.
Let's see how many more record highs the ASX 200 Index will give us in 2024.
