Today’s Market Update 12.18.24 Dovish? Hawkish ? Bearish!

I established my “Today’s Market Update” January 13, 2015. Amazing to think that was just about 10 years ago! For a bit of nostalgia, here’s a link to that 2015 “Today’s Market Update”. It became my commitment to send you a “Market Update” when two or more major U.S. stock indices drop >3% on the same day. That happened today. The stock market plunged today after the Fed signaled fewer interest rate cuts next year. The notable takeaways from today’s market action are three-fold; first, it was the worst day for the U.S. stock market since June of 2022, second, the Dow Jones index fell for the 10th consecutive day. That is the longest losing streak for the Dow in a lifetime (if you are under 50…). The last time the Dow fell 10 days in a row was 1974. And, thirdly, the Nasdaq composite’s drop was its worst Fed decision day loss since March 2001.

As I noted above, the market’s plunge today was due to the Fed. The Federal Reserve banks FOMC (Federal Open Market Committee) lowered interest rates. The Fed’s rate cut was another quarter-point reduction and the third rate cut in a row. This was no surprise as the market’s expectations for the quarter-point rate cut equated to a 97% probability. So, it is not what the Fed did, it’s what the Fed said that the stock market did not like. Essentially, the Fed indicated it would adopt a more cautious approach to future interest rate cuts. The market was expecting 4 cuts next year, as the Fed had forecast. The Fed hinted they are on a path towards 2 cuts. The Fed’s rate lowering is in and of itself “dovish” – favorable for the stock market. The Fed’s message was “hawkish” – not favorable for the stock market. Today’s reaction to what the Fed said was clearly “bearish”. But, we can’t stop that thought process there… The Fed’s view that fewer future rates cuts are necessary is because it sees a strong economy now and into next year. A strong economy is “bullish”. I know, not easy and often counterintuitive.

As you can see in the chart below, today’s stock market was hit hard. The Dow tumbled more than 1,100 points. Of the Dow 30, 29 were down. All 11 sectors of the stock market closed lower. Volume soared today and the volatility index surged. Recent index milestone levels were breached, as the Nasdaq fell below 20,000 and the SP500 dropped through 6,000. Notably, breadth was decisively bearish. Declining stocks topped advancers by more than 13-1 on the NYSE and by 6-1 on the Nasdaq.

Today’s market decline nearly wiped away the massive move from election day. So, the “Trump Bump” was almost erased. The SP500 has jumped nearly 5% from the close on November 5 through yesterday. It is now up just over 1%. One market analyst said, “Goodbye punch bowl. No Christmas cheer from the Fed.”

Today’s market action reminded me of December of 2018. The SP 500 fell more than 9% then. Certainly no Christmas cheer from Wall Street in December of ’18. That sharp drop was in part due to the Fed’s interest rate decisions. On Wednesday, December 19, 2018 raised rates for the 4th time that year. Further, it telegraphed at least two additional interest rate increases in 2019. This drove President Trump to Twitter with Tweets about how he felt about that and about Fed Chair Powell. Could this be the beginning of Trump vs. Powell 2.0? Here’s perspective on the market correction of late 2018. By the end of March 2019 the SP 500 had jumped nearly 14% from the December ’18 close.

Here’s some wisdom on investment risk by John Bogle:

“Regardless of what happens in the markets, stick to your investment program. Changing your strategy at the wrong time can be the single most devastating mistake you can make as an investor.”

— John Bogle, was a famous American investor and mutual fund industry pioneer. He was the founder of Vanguard in 1975. He said, “A sound investment strategy should be designed to carry you through market ups and downs.”