Holiday Market Volatility: A Perfect Storm of Uncertainty
As the festive season approaches, investors are bracing themselves for a tumultuous ride. The recent market gains on the final trading day of last week were insufficient to counterbalance the dual threats of a potential government shutdown and hawkish signals from the Federal Reserve.
Markets Take a Hit
The Dow Jones Industrial Average broke its 10-day losing streak but still recorded a 2.3% loss for the week. The Nasdaq Composite and S&P 500 fell 1.8% and 2%, respectively. This downturn is largely attributed to the shift in perceptions regarding the Federal Reserve’s interest rate policy. Central bankers now predict a shallower rate-cutting path in 2025, signaling a “higher for longer” approach.
A Cautious Approach to Inflation
The Federal Reserve’s preferred inflation gauge showed that price increases, excluding volatile categories, fell month-over-month in November but remained sticky. This has led to a renewed focus on inflation, with Fed Chair Powell and the lone dissenter, Beth Hammack, agreeing on the need for a cautious approach.
The Trump Factor
Some market observers believe the Fed is pre-positioning for potential disruptions in the new Trump era, including tariff battles and immigration labor force shocks. This could lead to inflationary policy changes, which would impact the Fed’s rate decisions. However, Powell insists that the Fed won’t react to potential policy changes until they are implemented and can be properly analyzed.
A Holiday-Shortened Week Ahead
Markets will close early on Tuesday and won’t reopen until Thursday. The shortened week will still provide an opportunity for Wall Street to parse through the Fed’s expectations for next year’s interest rate decisions. Economic data releases will be limited, but investors will be keeping a close eye on building permits, durable goods orders, and new home sales.
Expert Insights
David Alcaly, lead macroeconomic strategist at Lazard Asset Management, notes that hawkishness in the market and at the Fed is more related to potential policy changes than the current inflation trajectory. Chris Rupkey, chief economist at FWDBONDS, warns that Trump’s plans for spending, tax cuts, and tariffs could halt inflation’s downward climb. Chris Zaccarelli, chief investment officer for Northlight Asset Management, emphasizes that uncertainty will continue to dominate the market in early 2025.
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