Fed Projection Much Worse Than Expected, Setting Up for Santa Claus Rally

The market was expecting some hawkishness from the Fed and Jerome Powell, but it was much worse than expected. 

The indices were clocked for major losses. The Russell 2000 IWM dived 4.4% and more than filled the post-election gap. The S&P 500 took a 3% hit, and the Magnificent Seven was jammed down with a 4.4% loss. Breadth was horrendous, with just 925 gainers to 8,670 decliners.

The Federal Reserve did cut interest rates by a quarter-point as anticipated, but the big news was that Fed members now expect just two quarter-point cuts in 2025, down from four cuts. Unsurprisingly, the forecast for inflation ticked up to an average of 2.5% from 2.1%.

The market was anticipating that the Fed would signal no more immediate cuts, but Jerome Powell sounded far more hawkish than many had hoped.

It didn’t help matters that there has been this crazy divergence recently, with the Magnificent Seven flying higher and some pockets of severe speculation. The Fed was the spark that was needed to unwind the excesses.

Now what?

My view is that this may turn out to be exactly what is needed to set conditions for a Santa Claus rally to end the year. The smaller stocks that were acting so poorly were driven even lower. With tax loss selling coming to an end, there is a good opportunity for some bargain hunting in the worst-performing stocks.

I started making a few buys late this afternoon, but I’ll be ready to be very aggressive with some new purchases tomorrow. I see no reason to expect the selling that has been playing out for weeks now to accelerate further.

Have a good evening. I’ll see you tomorrow.

At the time of publication, DePorre had no positions in any securities mentioned.