The S&P 500 faced significant turbulence on December 6, 2024, following the Federal Reserve's recent decision to cut interest rates by 25 basis points. The Fed's move, initially seen as supportive, was overshadowed by its projections for fewer cuts next year than previously anticipated, throwing investors and analysts alike for a loop.
On Wednesday, all three major U.S. indices—Dow Jones Industrial Average, S&P 500, and Nasdaq—reacted sharply, reversing earlier gains to end steeply down. The S&P 500 plummeted nearly 3%, marking its worst day since recent months, and the tech-heavy Nasdaq Composite slid more than 3.5%. The Dow also made headlines by clinching its longest losing streak since 1974, falling for ten consecutive days and down over 1,000 points.
The Federal Reserve projected only two interest rate cuts for next year, fewer than the four cuts officials anticipated back in September. "The slower pace of cuts for next year really reflects both the higher inflation readings we had this year and the expectation inflation will be higher," remarked Federal Reserve Chair Jerome Powell during the press conference post-announcement. This cautious outlook illustrated the Fed’s shift from previous more aggressive stances, as inflation has remained stubbornly high, recently trending upwards.
The reaction from the market was immediate and severe. Investors fled from rate-sensitive sectors, with the small-cap Russell 2000 index dropping about 4%. Real estate sectors also suffered, reflective of the broader sentiment of caution gripping the market. Powell's assessment changed the tenor from what seemed like immediate relief to overt warning signs of sticking inflation pressures.
This announcement by the Fed was not without dissent. Newly appointed Cleveland Fed president Beth Hammack expressed her disagreement with the rate cuts, pointing to the continued need for vigilance against inflation. Capital Economics Chief North America economist pointed out this dissent makes the Fed's decision Wednesday appear as a "hawkish cut," increasing the prospect of keeping interest rates higher for longer than previously expected.
The volatility was exacerbated as the 10-year Treasury yield rose nearly 11 basis points, climbing to hover just below 4.5%. This increase signaled to investors the likelihood of prolonged higher rates, shaking confidence and leading to the sell-off across various sectors.
Further complicative factors arose as Powell indicated "policy uncertainty" surrounding President-elect Trump’s incoming administration, particularly concerning tax cuts and tariffs. "This adds another reason for the Fed to move slowly," Powell stated. The dichotomy between historical low unemployment rates and inflation continues to puzzle financial strategists, who gamble on market resilience amid vast uncertainties.
Adding to Powell's caution was his acknowledgment of the difficult path remaining for the central bank to meet its inflation targets. “We've had year-end projections, and it’s kind of fallen apart as we approach the end of the year,” he noted, underlining the rocky progress made to bring inflation down to the Fed's stated 2% target. Powell's ambiguity reflected the complexity of the current economic environment, noting core inflation could peak at 2.5% next year before easing off slightly over subsequent years.
The question now looms over investors: how will these Fed-informed shifts affect the S&P 500 and broader markets moving forward? 2025 projections remain half-hearted, with major strategists divided over their forecasts. The average target among Wall Street analysts suggests the S&P 500 will peak around 6,630 by 2025, which would require about a 10% jump from current levels. Yet analysts from BCA Research suggest the actual returns will likely be much more polarized, warning markets lean toward extremes rather than average behaviors.
The S&P 500 is set to end the year around 23.1% higher, but this strong performance is overshadowed by recent volatility and uncertainty around upcoming rate policies. A recent survey of market strategists reported similar findings, with many expressing skepticism about the ability to sustain bullish sentiment amid fluctuated Macroeconomic indicators.
With the Federal Reserve cautious, the S&P 500 will continue to face challenges. The turbulence following the latest announcements serves as both a stark reminder of market sensitivities to Fed actions and the complex interplay of economic factors shaping investor sentiment. Heading toward the new year, all eyes will remain fixed on Fed decisions and the broader impacts of the incoming administration's policy moves.
