Why not blame the Grinch? Wall Street is becoming less optimistic about the holiday season coming up at the end of the year. Stocks have been taking a break from their recent rise as the markets get ready for the last Federal Reserve meeting of 2024.
Many investors were hoping that the tech-led bull market would pick up more stocks in December, but it hasn’t. This has made people worry about how unstable the markets might be and put S&P 500 index value stocks SPYV -0.28% on a record losing run.
The blue-chip Dow DJIA -0.20% fell for the seventh day in a row on Friday. This is the longest losing streak it has had since February 2020. There was also talk of a “overdue” correction, especially since the Fed is likely to approve another small interest rate cut this week. Next year, they will switch to a slower rate of monetary easing.
“I would love to see a meaningful pullback in stocks,” said The Wealth Consulting Group’s top market strategist, Talley Leger.
Leger still thinks that holiday shopping and holiday cheer will give stocks a normal end-of-year boost, but he says, “We could get a little bit of turbulence in 2025.”
Backwards watch
On Friday, the S&P 500 index SPX -0.00% finished almost flat, but it was still on track for back-to-back yearly gains of more than 20% for 2024 and 2023. This is a big deal considering that Wall Street was worried about a recession earlier in the week.
In bull markets, stocks don’t always go straight up, but Dow Jones Market Data shows that this one hasn’t had any drops of at least 15% since October 2022. From 2011 to 2018, there had not been a drop of that size in more than two years.
“That old Titanic scene has been on my mind,” David Laut, chief investment officer at Abound Financial, said. “On the bow, your arms are wide open.”
Even though investors are excited about Trump’s second term because they think there will be less government control and more tax cuts for businesses. However, there is also a chance that inflation and import tariffs, bad tech earnings, or something else could happen that makes investors run for cover.
Laut said, “Why not take some money off the table and move down the multiples spectrum?” He also said that he is reducing his exposure to big caps to make his portfolio more balanced.
And he thinks that includes mid-cap and small-cap stocks (RUT -0.60%), emerging market stocks, having cash on hand for when chances come up, and putting 5% of your money into gold (GC00 -0.37%) and cryptocurrency (BTCUSD +1.99%).
Even more, in November, for every dollar put in the SPDR S&P 500 ETF Trust – SPY index, SPY -0.02% 31 cents would go to the “Magnificent Seven,” a small group of powerful megacap technology stocks. This shows how unfair this bull run has been.
Laut said this about his plan for 2025: “I’d rather be opportunistic.”
Ideas from the 1990s
After a two-day policy meeting, Wall Street thinks the Fed will lower its key interest rate by another 25 basis points on Wednesday. Since becoming Fed Chair in 2018, Jerome Powell has worked hard not to surprise the markets.
Powell has also made fighting inflation and helping the economy have a “soft landing” important goals for his second term at the Fed, which ends in mid-2026.
Leger of the Wealth Consulting Group said, “This feels a lot like the mid-1990s.” He compared it to the “run-up to tech mania 1.0” and the last time the Fed cut rates, which was during a “pretty favorable economic environment.”
Because of this, Leger thinks the Fed will be more careful about which rates it cuts at its meetings next year, especially if inflation stays “sticky” or “stubborn.”
The Fed is likely to lower its short-term rate to a range of 4.25% to 4.5% next week. This is about 1% above the range that many on Wall Street now think will be its “terminal range.”
The central bank, led by Alan Greenspan, lowered interest rates after Long-Term Capital Management went bankrupt in 1998, but then quickly raised them back up to 6.5% to try to pop the dot-com bubble but failed.
“People are less likely to expect rate cuts,” said George Cipolloni, portfolio manager at Penn Mutual Asset Management, of the 10-year Treasury yield.
TMUBMUSD10Y +4.396% rise by about 8 basis points just on Friday.
That raised the standard loan rate for the economy to 4.398% and added to its weekly rise of almost 25 basis points. This is the biggest change in over a year and a huge jump at a time when the Fed is trying to lower debt costs.
Cipolloni said, “There are some signs that inflation is not going away as quickly as we had hoped.” He said, “The market wants easing and cuts, but yields will be the Achilles heel for everything.” “Man, it’s going to be hard. Everyone wants yields to go down.”
Over the course of the week, the Dow Jones Industrial Average dropped 1.8%, which was the most since late October. The S&P 500 also fell 0.6%, and the Nasdaq Composite Index fell 1.4%.
Dow Jones Market Data shows that COMP +1.12% went up 0.3% for the week.
FactSet says that the Dow was up 16.3% for the year, the S&P 500 was up 27%, and the Nasdaq was up 32.7%.
Expect the Fed’s rate decision on Wednesday to be the most important event of the week. On Friday, the central bank will release its favorite personal-consumption expenditures PCE inflation gauge for November. Monday also brings news about the manufacturing sector of the business. On Tuesday, retail sales will be reported, and on Wednesday, home starts will be held. The GDP for the second quarter will be changed on Thursday.
