The Federal Reserve's latest decision to cut interest rates by a quarter point has caused significant turmoil across U.S. stock markets, leaving investors scrambling for answers. On December 18, 2024, the S&P 500 suffered its worst day on the anniversary of a Federal Reserve rate decision since 2001, plummeting 3% to end at 5,872.16. The day’s losses were primarily attributed to the Fed's unexpectedly cautious stance on future rate cuts.
During the post-meeting press conference, Fed Chair Jerome Powell emphasized the need for cautious policy adjustments, reiteration concerns about inflation, and pulling back on earlier projections for multiple rate reductions next year. The central bank forecast now estimates only two cuts instead of the previously anticipated four, creating ripples of uncertainty among market participants.
Investors had hoped the rate cut would signal more aggressive moves toward monetary easing. Contrary to these expectations, Powell declared, “We need to see progress on inflation. That is how we are thinking about it. It is kind of a new thing. We moved quickly to get to here, but moving forward we are moving slower,” as reported by Bloomberg.
The bearish response was swift: the tech-laden Nasdaq 100 also faced severe losses, dropping 3.6%. This downturn followed substantial gains earlier in the year, as stocks surged more than 10% after the Fed's previous July rate decision. Yet, on this fateful Wednesday, skepticism about the Fed's inflation-management strategy enveloped the market. Max Gokhman, senior vice president at Franklin Templeton Investment Solutions, described Powell's comments as those of “a hawk in dove’s clothing,” noting the contradictions between the Fed's rate cut and its wariness about future inflationary pressures.
The broader impact was felt beyond just the S&P and Nasdaq. The Dow Jones Industrial Average fell 2.6%, extending its streak of losses, marking its worst performance during such events for the first time in four decades. The average stock within the S&P 500 is now down since the election, reflecting bearish sentiment among investors who had initially responded positively to President-elect Donald J. Trump’s anticipated fiscal policies.
Market reaction to the Fed’s decision sparked concerns about persistent inflation. Recent projections revealed heightened expectations for inflation over the next couple of years. “The Fed has raised its GDP growth forecasts for 2024 and 2025, which showcases the U.S. economy’s strength. Yet this growth risks fueling inflationary pressures,” explained Quasar Elizundia, research strategist at Pepperstone.
Such inflation fears are compounded by the fact the average S&P 500 stock is now worth less than it was on November 5, the date of the presidential election. Instead of the expected “Trump bump,” investors are beginning to see warning signs of economic turbulence.
Even with notable winners like circuit board maker Jabil, which surged 7.3% after beating profit forecasts, the broader market was decidedly negative. Shares of Paycom Software plummeted 10.1% following the central bank's announcement, as worries about growth overshadowed positive earnings news.
Industry analysts are left contemplating whether this market reaction is indicative of temporary volatility or the start of something more serious. Elliott Wave analysis has taken on new significance, predicting whether the initial market decline exhibits traits of three-wave correction or signifies larger five-wave declines. This analytical divide could dictate investor sentiment moving forward, complicates trading strategies as uncertainty reigns.
Overall, the market struggles post-rate cut reflect the delicate balance the Federal Reserve must maintain; it’s caught between supporting growth and managing inflation. Powell’s commitment to achieving the 2% inflation target may mean investor expectations for aggressive rate cuts will need recalibrations. The caution demonstrated by the Fed has resulted not just in declining index values, but also affected investor sentiment at large.
The road ahead remains fraught with uncertainties as expectations for upcoming economic data, including the US PCE inflation and personal income reports, loom on the horizon this Friday. While economic indicators might sway future policy decisions, today’s losses serve as cautionary signals for investors to stay alert and strategic as market conditions evolve.
