It’s kind of funny.
There was absolutely nothing the Fed said on 12/18 that was a surprise to me. Nor was it a surprise to anyone on the CNBC panel of experts. And yet still the market tanked on the Wednesday afternoon announcement.
So let’s spend our time today digging into the Fed actions...future expectations...and what that means for our stock market outlook.
Market Outlook
The Fed lowered rates for a 3rd straight meeting as was broadly expected on Wednesday. However, their quarterly Summary of Economic Predictions did have some substantial changes. Most notably a slower pace to rate changes in 2025 all the way into 2027.
This is a surprise to NO ONE if they appreciate the Fed’s dual mandate; stable prices and full employment.
Yes, they want lower inflation. But if they leave rates too high for too long they risk creating a recession which naturally brings with it unwanted job loss.
So even though inflation seems to be leveling out a touch too high of late...so too there are signs of softening in the employment market. That is why they served up 1 more rate cut in December...and why they are preparing folks for a slowing of the pace of rate cuts ahead where they don’t finish the job of cuts til 2027 (instead of the previous assumption of 2026).
Also important to note they are doing this to keep GDP growth a notch above previous expectations. And that is a positive for their change to the employment outlook as well.
Net-net I see this as a positive that they are generating a soft landing for the economy which is not the typical outcome from a rate hike cycle. Remember that 12 of the 15 previous times the Fed has raised rates that a recession ensued. So these academics have learned from the past leading to a more prudent approach leading to a better outcome.
Again...these Fed plans and the economic results are all subject to change depending on the data (namely inflation and jobs). This means that the key reports going forward to pay attention to are:
- CPI
- PPI
- PCE
- Weekly Jobless Claims
- Monthly Government Employment Situation report
The initial reaction to all the above from the market was not good with the S&P 500 (SPY) falling nearly 3% on Wednesday...back below 6,000 for the first time in December. The pain was much worse for Risk On positions including a -4.39% loss for the small caps in the Russell 2000.
Basically, traders flipped over the table after the report as the spoiled children they are. Meaning someone is threatening to give them less sugar (rate cuts) and they are having a temper tantrum.
This will prove temporary.
What really matters for stock prices in the long run is the state of the economy...and what that means for earnings growth. As long as there is no sign of recession then very hard to be bearish.
This explains the bounce on Thursday and Friday as more level heads prevailed. Do expect some volatility in the mean time as folks sort out their short term trades vs. long term investments.
Again, in my book all the recent pain is about short term trades not being properly aligned with the Feds revised plans.
In the long run, few will deny that this is a bull market with healthy economy and earnings growth. And yes, rates will go lower...just at a slower pace.
So even those investments based on lower rates (like home builders, financials and auto) will still be likely outperformers over the next 12-24 months. This recent correction in the group is a great opportunity to get on board those stocks.
Again, you should expect some volatility in the near term as short term traders and long term investors wrestle with mixed agendas. This will likely make way for the next leg higher for this bull market where I believe that Risk On stocks will outperform.
The key will be having an eye towards value as some sectors of the market are getting a bit stretched on that front. Gladly our POWR Ratings model has 31 different factors of value...more than 25% of the model trained on finding fundamentally healthy stocks trading at a discount. That formula should continue to outperform in 2025.
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SPY shares were trading at $593.64 per share on Friday morning, up $9.51 (+1.63%). Year-to-date, SPY has gained 26.07%, versus a % rise in the benchmark S&P 500 index during the same period.
About the Author: Steve Reitmeister
Steve is better known to the StockNews audience as “Reity”. Not only is he the CEO of the firm, but he also shares his 40 years of investment experience in the Reitmeister Total Return portfolio. Learn more about Reity’s background, along with links to his most recent articles and stock picks.
Stock Investors: Are You “Fed Up”? StockNews.com
