U.S. stocks plummeted on December 18, 2024, following the Federal Reserve's forecast indicating fewer interest rate cuts than previously expected. The S&P 500 fell 178 points, or 3%, continuing its downward trend from its recent all-time high. The Dow Jones Industrial Average suffered an even greater loss, dropping by 1,123 points, or 2.6%, and the Nasdaq composite fell by 3.6%. This response came as the Fed decided to lower rates for the third time this year, starting from the significant high of the last two decades to invigorate the job market.
Despite Wall Street's anticipation for the Fed's decision, investors appeared unsettled by the Fed's revised forecast, which now projects only two rate cuts next year instead of the four previously speculated. This forecast, coupled with persistent inflation concerns, has triggered anxiety among market participants. Jamie Cox, managing partner at Harris Financial Group, noted, "Markets have a really bad habit of overreacting to Fed policy moves." It seems many investors are preferring to sell off now before heading off for the holiday break.
The specific details shared by Fed Chair Jerome Powell emphasized the current state of the job market and inflation as the basis for this caution. Powell stated, "When the path is uncertain, you go a little slower," comparing the Fed's precautionary approach to driving at night through fog. The central bank’s median projections have changed significantly, now leaning toward two cuts totaling half a percentage point, compared to the previously forecasted four cuts.
This news spooked different sectors, particularly rate-sensitive ones like real estate and consumer discretionary stocks. The S&P 500 Consumer Discretionary Sector Index took a hit, plummeting by 4.6%, with troubled tech giants Tesla and Amazon leading the charge, both down 8.3% and 4.6%, respectively. Meanwhile, the S&P 500 Real Estate Sector Index experienced similar challenges, falling 4% as overall market sentiment soured.
On the broader market level, the Dow extended its losing streak to ten consecutive days, indicative of the pressure being felt across nearly all sectors. Notably, the Russell 2000 index, reflecting small-cap stocks, fell by 4.4%. Smaller companies, often more reliant on borrowing, are feeling the strain of higher interest rates which could limit their growth prospects. These trends underline the interconnectedness of various sectors and the broader economy.
Commentary from analysts highlights deep concerns surrounding these developments. Jeff Buchbinder, chief equity strategist for LPL Financial, remarked, "The big jump in inflation expectations and related bond sell-off was a convenient excuse." This sentiment captures the anxiety present on Wall Street, where up until recently, confidence had been buoyed by consecutive highs marked through 2024.
Following the Fed's decisions, Treasury yields have risen, with the yield on the 10-year Treasury climbing to 4.51%, up from 4.40%. Expectations related to the Fed's actions heavily influenced this upward movement, particularly affecting smaller firms with more significant shares of floating-rate debt.
Looking forward, the market's future might be, as Powell put it, filled with uncertainties, especially considering upcoming political shifts with President-elect Donald Trump set to take office. Investors worry how his policies, particularly those involving tariffs, might compound inflationary pressures already at play.
The market response underlines the challenges the Federal Reserve faces now and moving forward. The delicate balance of supporting growth through rate cuts, managing inflation, and responding to financial market dynamics creates significant pressure on the Fed's policymakers.
Despite the government leaning toward fewer cuts, the full impact of this decision plays out across economies far beyond mere policy announcements. Observers will keep close tabs on future economic data and the effects of rate changes as they develop through 2025. The coming months will be pivotal for market participants trying to navigate the uncertainty post-announcement.
