The stock market experienced an intense roller coaster ride this past week, reflecting a mix of economic news, corporate earnings, and shifting investor sentiment. The major indices showed hesitant results over the week. The S&P 500 ended the week slightly down .3%, the Nasdaq faced significant pressure dropping 1.2%, and crypto markets ended in the red with Bitcoin finishing the week down 6%. There were multiple factors implicating the market's movement. The Federal Reserve’s December meeting complied with markets 98% certainty of a December rate cut. This brought the Fed funds rate from 450-475 bps, down to 425-450 bps. Typically the dovish change in rates affects markets positively, as lower borrowing costs encourage consumer spending, capital expenditure, and favorable debt restructuring. Jerome Powell finished his address by reinforcing the possibility of maintaining interest rate levels further in 2025. This landed the markets' pricing in a mere two rate cuts contradicting the prior expectation of four rate cuts in 2025. This news was felt directly as markets sold off immediately. Powell asserted his reasoning was that the committee's attention was on the 2% inflation goal. Two rate cuts give the committee dry “gunpowder", a phrase used by Fund Strat’s Chief Investment Officer Tom Lee. The analogy stems from the committee leaving room to cut if labor market data weakens through 2025.
In the bond market, U.S. Treasury yields climbed. The 10-year yield reached 4.5%, up from 4.3% the week prior. Higher yields often signal that borrowing costs are rising, which can slow down economic growth. This increase reflects investors' concerns over market uncertainty stemming from incoming President Donald Trump’s Tariff rumors. The incoming President proposed 60%-100% tariffs on Chinese goods, 10-20% tax on all products from U.S trading partners, and upwards of 25% on imported goods from Mexico and Canada. The bond market's reaction indicates a belief that the Fed may be forced to keep interest rates high and for longer, given the inflationary trading policies and tax plans proposed by the incoming administration.
As for the broader global market, oil prices dipped below $85 per barrel, a decline of 2% for the week. This was driven by reports of increasing U.S. crude inventories and concerns about slowing global demand. Gold, on the other hand, saw a small uptick, closing at $1,950 per ounce, (expected) as investors sought safety amidst macro uncertainty. European stocks fell slightly, reflecting weaker-than-expected industrial output in Germany and ongoing concerns about energy supplies heading into winter; Meanwhile, China’s economic recovery showed mild signs of stabilization, with modest growth in retail sales and industrial production.
Takeaways: In my opinion, a great buying opportunity arose this week. Markets dipped highlighted the ongoing tug-of-war between a data dependent Fed and the uncertainty of changing geopolitical conditions. This week's pullback seemed relatively healthy, as the stock market dip was responsive to healthy fed policy, rather than alarming economic data. The labor market (while slowly cooling) continues to impress following a two year hawkish Fed cycle, and inflation (while slowly rising) remains relatively near the Fed’s benchmark of 2%. Overall a continued path for growth is likely in store, given the Fed isn't forced to to pivot from its easing cycle. The foreseeable threats causing the Fed to a pivot would likely depend on if inflation is confidently escaping their benchmark goal.
