After three months of partying with interest rate cuts, Federal Reserve Chairman Powell suggested that it might be time for the markets to tone down the party. Following last week’s 25 basis point rate cut, the markets had eagerly priced in three or four more rounds of rate-cut confetti for 2025. Now, they are scrambling to recalibrate and let us just say, the hangover is not pretty. The Fed now anticipates only two rate cuts in 2025.
The dollar index surged and Treasury yields spiked, exacerbating negative impacts on risk assets. With US equities flaunting all-time highs and historically lofty valuations according to my neighbors, the sharp price drop should not have caught anyone off guard. Well, frothy markets are exciting until they are not.
Come on, it is not as bleak as some might believe. Really? The good news? This froth-clearing moment comes with a silver lining. Once the markets recalibrate to the idea of a slightly less generous Fed, the focus can shift back to what really matters. Nothing goes up in a straight line. I have talked about it, sometimes to deaf ears and blind eyes.
It was also likely that some last-minute profit-taking was at play as we barrel toward the year’s finish line. After all, nothing says “Happy Holidays” quite like locking in gains before the ball drops.
Ho, ho, ho! Should investors believe in Santa this year? Looking ahead, we are in for a relatively quiet week on Wall Street, with Christmas on Wednesday though the data elves have a few reports queued up.
Expect thin liquidity and some range-bound trading. Stops are often placed on leveraged positions. This creates a chance for those remaining in the market to activate those stops with a relatively small amount of capital.