The U.S. stock market experienced sharp fluctuations this past week, characterized by dramatic rebounds and steep declines. On Friday, December 15, the Dow Jones Industrial Average gained 497 points, equaling about 1.2%, following earlier losses from its longest losing streak since 1974. This surge came after the release of cooler-than-expected inflation data, calming investor fears over the Federal Reserve's potential hawkish stance moving forward.
The week's tumultuous trading began with substantial losses; the Dow had earlier dropped over 1,000 points before bouncing back. The tech-heavy Nasdaq Composite and the S&P 500 also gained 1.1% each, yet these gains were not enough to offset the overall decline for the week, with all three indices ending lower. The Nasdaq, for example, ended down approximately 1.8%, contributing to the pervasive sense of uncertainty gripping Wall Street.
Central to this volatility was the release of the core Personal Consumption Expenditures (PCE) price index, which is closely monitored by the Federal Reserve as its preferred measure of inflation. The data indicated price increases only rose 0.1% month-over-month, significantly lower than the predicted increase of 0.2%. On an annual basis, the index rose only 2.4%, slightly below estimates of 2.5%. Morgan Stanley commented on the PCE numbers, stating, "[W]e think the 12-month pace of core PCE will resume its downward trend in 1Q25 and, accordingly, the Fed will cut 25bp in March 2025."
These signals of easing inflation alleviated some concern among traders, fostering hopes of unearthing some stability amid other market pressures, like looming government shutdowns. Indeed, throughout the week, worries mounted about potential disruptions stemming from inability to finalize government funding. President-elect Donald Trump, alongside congressional Republicans, has critiqued earlier spending proposals, sparking fears of closures impacting federal operations across the country.
Such turmoil contributed directly to trading dynamics, and on December 14, for example, stocks largely fell as negotiations faltered. Trump intensified this uncertainty through social media, stating, "I told the European Union they must make up their tremendous deficit with the United States by the large scale purchase of our oil and gas, otherwise, it is TARIFFS all the way!!!" This sentiment was enough to shake market confidence, particularly among global tech stocks.
Among sectors particularly influenced were chip manufacturers, who saw stock fluctuations linked to international trade developments and threats posed by tariff implementations. Major players like Nvidia and TSMC were particularly sensitive to these discussions, reflecting broader impacts on how investors are reacting to both supply and pricing pressures. The outcomes have proved unsettling, especially as options tied to stocks and ETFs were set to expire on the last trading day, adding another layer of complexity to trading decisions.
Corporate news also featured prominently within the week’s market narrative. FedEx reported unexpected earnings, yet the announcement of plans to spin off its freight business rendered shares stagnant at best. Meanwhile, Novo Nordisk’s stock plunged nearly 20% after its next-generation obesity drug did not meet market expectations during trials, shedding about $125 billion from its market valuation.
The mixed results and major corporate announcements reflected broader market sentiments. Analysts have voiced concerns over the Federal Reserve’s mindset moving forward. Beth Hammack, president of the Cleveland Fed, stated, "There is more work to do on inflation," emphasizing the challenges remaining for monetary policy adaptation, positioning the Fed's approach as necessary but not yet sufficient.
Despite these challenges, there remains cautious optimism driven by the outcomes of the week’s inflation reports and subsequent Fed commentary. Austan Goolsbee of the Chicago Fed shared this perspective on CNBC, adding, "We're still on path to get to 2%,... I'm hopeful this suggests... more of a bump than a change in path" for inflation expectations.
Investors are now left to navigate these uncertainties with interest rate hikes likely slowing, reflecting fears of inflation's tenacity and unexpected government interventions coming up. Reports highlight, "higher for longer" is the mantra likely to guide traders as they set expectations for what could be more pronounced market adjustments through the upcoming months.
The impending government budget issues remain unresolved and could add additional friction. If lawmakers fail to navigate their disagreements swiftly, the direct consequences extending from government operations to broader economic sentiment risk plaguing the market for longer than anticipated. Hand-in-hand with inflation data, traders will need to keep their eyes open for both macroeconomic and political developments constructing the future of the U.S. markets.
