The US stock market experienced a turbulent week on Wall Street, with volatility spiking and some overheated assets cooling off. Chicago Fed President Austan Goolsbee’s comments refocused investors’ attention on the encouraging trend in inflation and the likelihood that interest rates still have room to be trimmed.
A recent 1.1% relief bounce in the S&P 500 was driven by a tame PCE inflation reading and a pre-conditioned market following three weeks of oppressive selling pressure. However, the Federal Reserve’s rate-setting path for next year has seen quick repricing, with the S&P 500 dropping 3% on Wednesday after the Fed’s decision and outlook release.
Despite this, some analysts argue that the recent wobbly action in the indexes, surge in volatility, and reversals in overheated assets were overdue to test the bull market against higher bond yields and a more-foggy policy horizon. The testing process may not be complete yet.
Strategists were lining up with bullish unanimity for 2025 index targets, but some corrective action has reached certain groups, such as MicroStrategy, which is down by a third in the past month. The divergences inside the market got stretched to brittleness, and the steady rise in Treasury yields alongside a rollover in economic-surprise indexes made for an uneasy setup.
However, U.S. GDP continues to track above long-term trend, 2025 corporate-profit-growth projections are holding up fine, credit conditions remain rock-solid, and no serious damage has been done to the longer-term bull trend. The current market’s skid is less severe than in December 2018, which was caused by Fed rhetoric perceived as too hawkish.
Citi strategist Scott Chronert sums up the market’s latest wobble as a preview of an expected push-pull that might animate 2025. “A lot of this is pulling forward concerns we had for the first half of 2025,” he said, adding that markets will have to work through a period of policy uncertainty before refocusing on possible policy opportunities.
On a tactical basis, some worthwhile work was done last week, with the S&P 500 retreating back to levels seen after Election Day and holding there. The market responded positively to oversold conditions with an impressively broad bounce Friday. However, negative market breadth has been severe, especially in economically sensitive sectors, and technical analysts view a short window for improvement before ominous macro messages.
Treasuries didn’t rally much on Friday’s cool PCE inflation report, and real 10-year year rates remain above 2%, which historically restrained the economy and gave equities pause. The housing sector seems stuck if yields don’t fall quite a bit. The one-line story of this entire 26-month bull market is “Inflation coming down faster than the economy has slowed.”
Source: https://www.cnbc.com/2024/12/21/bull-market-tested-as-volatility-spikes-overheated-assets-cool-off-the-testing-may-not-be-done.html