Stock Market Midday Update Thursday December 19, 2024
Yesterday The FOMC has cut its benchmark rate by a quarter percentage point for the third time this year 2024, lowering the target range to 4.25%-4.50%. This marks a full percentage point decrease since the cutting cycle began in September. The last time rates were this low was in December 2022, when the Fed was raising rates to combat high inflation. Recently, the Fed has shifted focus to supporting "maximum sustainable employment," especially after September and October's inflation data.
At the press conference, Powell noted that inflation and job market risks are now balanced, which is crucial for future rate decisions. The current economic conditions suggest that lower rates are still justified, despite rising inflation expectations. Investors are now focused on the pace of future cuts, with the "dot plot" indicating two cuts next year, down from four previously.
Stocks reacted negatively to the news yesterday, with major indices closing lower. Powell addressed questions about the committee's approach and mentioned that some members began incorporating conditional estimates of policy impacts into their forecasts, highlighting policy uncertainty as a factor in inflation projections.
The updated Summary of Economic Projections shows a slight increase in inflation forecasts, with PCE estimates at 2.4% for headline and 2.8% for core. Powell reiterated the importance of data dependence and a meeting-by-meeting approach.
These statements indicate that the Fed's decision-making process is becoming more complex. There are greater concerns about inflation risks, varying views on policy, and a slower approach to normalizing interest rates. As a result, markets have adjusted by reducing risks in their portfolios, signaling fears of ongoing monetary tightening and greater uncertainty about the Fed's future decisions.
The Federal Reserve (Fed) aims to bring interest rates to a "neutral" level. The current Fed Funds Rate is 4.50%, well above the estimated neutral range of 2.50% to 3.00%, where policy neither boosts nor slows the economy.
The Fed faces a balancing act — controlling inflation, supporting growth, and maintaining market stability. A slower rate-cutting cycle could impact market expectations, asset prices, and bond yields.
Powell's Comments Indicate Caution, Leading to De-risking in Markets
Federal Reserve Chair Jerome Powell announced that the FOMC now expects higher inflation in 2025, which differs from some market predictions that inflation might be lower than what the Fed anticipates. He also mentioned that some Fed officials may consider the potential inflation effects of a Trump administration. Given these uncertainties, Powell stressed the importance of slowing down the pace of interest rate cuts, signaling a more careful policy approach.
This change in outlook caused a significant de-risking of stocks and riskier assets. Investors reacted negatively to what they saw as a change in the anticipated pace of rate cuts. Specifically, if the Fed’s updated dot plot suggests two fewer cuts for 2024 compared to earlier projections from September 2024, the markets view this as a "hawkish" stance. This surprised many investors, as it implied a longer duration of tightened monetary policy and decreased the chances of early rate reductions.
Bottom Line Bullish View:
The S&P 500 SPY ETF is currently trading above an important support level (marked by the green line) without triggering a sell signal from our proprietary algorithm. The Nasdaq100 ETF QQQ is currently trading above an important support level (marked by the green line) without triggering a sell signal from our proprietary algorithm.
A significant takeaway from the Fed's statement is that they believe the labor market is not the main factor driving inflation. This is crucial because it challenges the justification for ongoing inflation. If rising wages are not fueling inflation, the argument for expecting higher inflation becomes less compelling. This suggests that the Fed is prioritizing flexibility in its policy changes instead of focusing primarily on curbing high inflation.
The Federal Reserve is working to lower the Fed Funds rate to its neutral range of 2.5% to 3.0%. Currently, the rate is between 4.25% and 4.50%, which means there is a significant gap that needs to be addressed. To close this gap, the Fed might need to reduce the rate by 25 basis points in 6 to 8 separate cuts. This shift would move the policy from restrictive to neutral, helping to promote long-term growth and stabilize inflation. Market participants will pay close attention to the Fed's guidance, as the timing and speed of these cuts are important for market sentiment and asset values. This is bullish in our view, indicating that the Fed is still dovish.
On 09/13/2024, the SPY and QQQ ETFs, Our year-end outlook remains optimistic, supported by our proprietary algorithm and favorable liquidity conditions. Cash on the sidelines continues to accumulate, creating potential for a strong inflow into equities. China's PBOC has introduced significant monetary easing, adding further global stimulus.
Bottom Line Bearish View:
On December 11, 2024, the S&P 500 Equal Weight RSP ETF triggered a sell alert, followed by the Russell 2000 ETF IWM and the Dow Jones Industrial Average ETF DIA on December 13, 2024, according to our proprietary algorithm.
Fed Chair Powell's Remarks Prompt Market De-Risking His comments signaled a more cautious and uncertain approach to rate cuts in 2025.
1️⃣ On Inflation and Rate Cuts: Powell highlighted that the "slower pace of cuts for next year" reflects both higher-than-expected inflation this year and an expectation that inflation will remain elevated moving forward. This signals a more gradual reduction in rates, with the possibility that the path to the Fed's neutral rate could be longer and more deliberate than previously anticipated.
2️⃣ On Economic Forecasts and Policy Impact: Powell also noted that some Fed participants have started to incorporate the potential economic impact of policy changes into their forecasts, but with significant variation. He explained that "some people did, some did not, and others did not disclose their stance", highlighting internal differences within the Fed on how to model future policy effects. This uncertainty suggests a less cohesive forward guidance on rate cuts, adding to investor caution.
Powell reiterated the importance of data dependence and a meeting-by-meeting approach. Fed Funds futures now predict only one rate cut in 2025, a change from the previous expectation of 2-3 cuts before the December FOMC meeting. This adjustment indicates a move towards a more hawkish approach, influenced by the Fed's updated inflation outlook and a slower strategy for easing rates.
Cycle Pivot:
Our next cyclical pivot is projected for January 6-10, 2025, which is expected to signal a significant market top. However, we will wait for confirmation from our algorithms before issuing a sell signal, as we avoid trying to time market tops or bottoms. Instead, we focus on positioning for the next market move based on strong data-driven signals rather than speculation.
Macro News Tomorrow:
Economic Data Release Schedule — Friday, December 20
8:30 AM ET
PCE m/m (Nov): Actual 0.2% vs. Forecast 0.2%
Core PCE m/m (Nov): Actual 0.2% vs. Forecast 0.27%
PCE y/y (Nov): Actual 2.5% vs. Forecast 2.3%
Core PCE y/y (Nov): Actual 2.9% vs. Forecast 2.796%
10:00 AM ET
UMich 1yr Inflation Expectations (Dec F): Actual 2.9% vs. Forecast 2.9%
UMich Sentiment (Dec F): Actual 74.2 vs. Forecast 74.0
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