U.S. stocks soared on Friday on better-than-expected inflation numbers but ended the week lower on rising bond yields.
The S&P 500 ended Dec. 20 at 5,930, down 1.99 percent for the week; the Dow Jones was down by 2.25 percent; the Nasdaq down 1.78 percent; and the small-cap Russell 2000 lost 4.45 percent to end at 2,242.
Stocks began the trading week mainly on the positive side, with all major equity averages edging slightly higher ahead of the Federal Open Market Committee (FOMC) meeting on Wednesday afternoon.
The FOMC meeting is a key event for investors, providing insights into the Federal Reserve’s monetary policy decisions.
However, after the meeting, the market took a downturn following the FOMC announcement of a quarter-point cut in the Federal Funds rate. This decision, in line with market expectations, led to a sell-off as investor strategists were disappointed by conservative guidance for further cuts in 2025 due to elevated inflation.
Steve Wyett, chief investment strategist at BOK Financial, described the Fed’s guidance as “nuanced.”
“The path to their 2 percent inflation goal was lengthened as expected rate cuts this year and next were reduced,” he told The Epoch Times.
“There seems to be a sense from the Fed that they are still too restrictive, which puts the employment market at risk, while the idea of continued economic growth means they think they should slow down. The question of where ‘neutral’ is remains an open question.”
Robert Frick, corporate economist with Navy Federal Credit Union, said the Fed’s prediction of fewer rate cuts next year spells bad news for heavily indebted consumers. “Lower-income Americans, in particular, are already struggling under the cumulative weight of inflation that’s made loans necessary for necessities from food to rent,” he told The Epoch Times.
“Goodbye punch bowl,” David Russell, global head of market strategy at TradeStation, told the Epoch Times. “No Christmas cheer from the Fed. Policymakers see higher inflation and lower unemployment in 2024. There is simply no reason to be dovish, given that outlook. Easy lifting is now done when rates are no longer restrictive. It’s a logical time to pause.”
The negative reaction to the Fed’s 2025 guidance was first felt in the credit markets, where the benchmark 10-year Treasury bond yield jumped to a four-month high of 4.60 percent. These yields are the discounting factor in most equity valuation models. As a result, higher bond yields make the earnings of publicly listed corporations less valuable when discounted to the present, leading to lower equity prices.
That’s particularly the case for technology and small-cap shares that trade in anticipation of distant rather than immediate earnings. Thus, the broad sell-off in the tech-heavy Nasdaq and small-cap Russell 2000 hit the hardest.
However, trader and investor sentiment shifted in the other direction on Friday thanks to some inflation reports, which came better than expected. The core PCE index in the United States, a key measure of inflation that excludes volatile food and energy prices, rose 0.1 percent in November 2024, less than the 0.3 percent increase recorded in October and September and forecasts of 0.2 percent.
Meanwhile, some other reports indicated that the U.S. economy may be cooling off, such as the personal income and spending reports, which came slightly below market expectations.
The nation’s central bank wants to see moderate inflation and a cooling economy before its next interest rate cut.
