The financial markets experienced a whirlwind of volatility this past week, leaving investors on edge as they navigated a series of dramatic events. The Federal Reserve’s hawkish tone at the Dec. 18 Federal Open Markets Committee meeting, coupled with political turmoil in Washington, sent shockwaves through equities. With the new administration’s fiscal policies looming and inflation concerns lingering, the stage is set for a challenging start to the new year. Here’s a breakdown of last week’s critical developments and what they mean for investors.
The Fed’s Hawkish Surprise
On Wednesday, Federal Reserve Chairman Jerome Powell faced a tough news conference following the FOMC meeting. The central bank lowered the Federal Funds Rate by 25 basis points, marking a cumulative reduction of 100 basis points since September. However, the Fed’s message was clear: Future rate cuts will depend on meaningful progress in reducing inflation, which remains stubbornly stuck between 2.5% and 3%.
This cautious stance, coupled with frustration among Fed officials over the slow pace of reducing inflation, rattled the markets. The FOMC now anticipates only two additional rate reductions in 2025, assuming inflationary pressures subside further. These developments triggered a sharp selloff, with the S&P 500 logging its worst performance on a Fed decision day since 2001. The Dow Jones Industrial Average, meanwhile, extended its losing streak to 10 consecutive days — the worst stretch since 1974. (Source: Bloomberg)
D.C. Drama Adds Fuel to the Fire
As Congress scrambled to pass a short-term budget extension to prevent a government shutdown, chaos erupted, further unsettling investors. The incoming administration’s demand to suspend the national debt ceiling added another layer of uncertainty, underscoring the significant impact of government actions on financial markets. Investors remain divided over the potential effects of the new administration’s pro-growth policies, such as deregulation and corporate tax cuts, versus concerns about rising tariffs, stricter immigration policies and swelling budget deficits.
A Mixed End to the Week
Friday brought a momentary relief rally in U.S. equity markets, driven by the release of the Personal Consumption Expenditure (PCE) Index, the Federal Reserve’s preferred inflation gauge. The PCE rose 2.4% year-over-year, slightly below expectations, offering a glimmer of hope for investors. Despite the rebound, markets closed the week with losses, as major indices fell approximately 2%. The 10-year Treasury yield finished at 4.52%, reflecting persistent unease among fixed-income investors.
Looking Ahead: Year-End Market Outlook
As we enter the final stretch of the year, investors face two shortened trading weeks. While the much-anticipated “Santa Claus Rally” seems unlikely, the S&P 500 is still poised to finish with back-to-back annual gains exceeding 20%. Despite the expected volatility during the transition to a new administration, the robust economy and earnings power of U.S. corporations could set the stage for a favorable investment environment in 2025.
This is the final post for 2024 as our team will be taking time off between now and New Year’s to enjoy holiday festivities with family and friends. We’ll return with our next blog post on Jan. 6.
From all of us at Elevage Partners, we wish you a joyous holiday season — a Merry Christmas, Happy Hanukkah, Happy Kwanzaa and a very Happy New Year!
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