It looks like the U.S. Federal Reserve decided to play the part of the Grinch today, pouring cold water on the Street’s ongoing holiday rally with a very hawkish update. And we’ve got one word to describe the day’s price action – ouch!
In short, while the Fed did cut interest rates today, its December update also spooked the markets, stoking bearish sentiment among investors. That’s because the central bank signaled that it doesn’t want to cut rates too many more times because inflation is becoming a concern once again.
This diversion from the market’s expectations has led investors to sell stocks in droves.
Indeed, back in September, the Fed said that it planned to cut rates four additional times in 2025. But today, the central bank noted that it now only plans to cut rates twice next year. And Wall Street thinks it could be even less, with the futures market now pricing in just over one rate cut in 2025.
With next year’s anticipated cuts now essentially getting priced out, the market is adjusting to a world where the Fed may be finished cutting interest rates. As a result, Treasury yields spiked. And stock prices, cryptos, and commodities all tanked into the close.
But we think this reaction is quite overdone.
And in fact, we’re confident that this market crash will soon create great buying opportunities as we move into the new year.
What to Make of This December Update
As we mentioned, today’s nasty flush is due to investors’ fear that the Fed is done cutting rates.
But in reality, the central bank was just reacting to the hot inflation data we received in October and November. And already, that data has since softened here in December.
That is, the Empire State Manufacturing Survey’s Prices Received Index – a good proxy for inflation – plunged in December to 4.2, its lowest level since July 2023.
The same index in the New York Fed Services Survey – another strong proxy – also plunged this month to 11.7, its lowest since February 2021.
Meanwhile, the S&P Global Composite PMI Report found that average prices charged for goods and services only rose very modestly in December. They are currently increasing at their slowest rate since prices began rising in June 2020.
And commodity prices, for their part, are also down this month.
In other words, real-time data suggests that reinflation worries are already outdated. It appears that inflation pressures are easing, and disinflation trends are, thankfully, re-emerging.
We expect such disinflation will continue over the next few weeks and months. And that should encourage the Fed to return to a more dovish stance. The market will then start pricing in more rate cuts. Treasury yields will fall, and stocks will rebound.
That’s why we think today’s crash creates a great buying opportunity.
But don’t be in a rush to buy…
The Final Word on a Hawkish Fed
As those who follow our research know, we don’t like buying dips blindly. And we certainly don’t like catching falling knives.
Instead, we wait for technical support to arrive so the market can find its footing and start to rebound. Then, we buy the dip.
So… for now… the best thing to do… is wait.
Wait for the dust from this selloff to settle, for technical support to show up – and hold. Wait for the market to bounce, and then buy into that rebound with confidence.
Until that moment comes, don’t stress this selloff. This doesn’t signal the end, either for the 2024 holiday rally or this ongoing bull market.
We’re convinced that this is just a normal pullback – one that will create some great buying opportunities.
And we’re on the lookout for the best stocks to buy on this dip.
Learn more about how we’re able to zero in on opportunity, even amid nasty market volatility.
On the date of publication, Luke Lango did not have (either directly or indirectly) any positions in the securities mentioned in this article.
P.S. You can stay up to speed with Luke’s latest market analysis by reading our Daily Notes! Check out the latest issue on your Innovation Investor or Early Stage Investor subscriber site.
