Following the Post-Fed Sell-Off, We're Not Out of the Woods Just Yet

Following Wednesday's dramatic post-Fed policy meeting sell-off that pushed the S&P 500 even deeper into short-term oversold territory, futures point to a comparatively modest rebound when equity markets open later on Thursday morning.

That late-day sell-off came even though, as we discussed, the Fed delivered on market expectations for a 25 basis-point rate cut and updated economic projections that included a more vibrant GPD forecast, a slower pace of progress on inflation and two 25 basis-point rate cuts next year, down from in the September projections.

Uncertainty Over Rate Cut Timing Hit the Market

What weighed on the market and sent the Volatility Index (VIX) soaring more than 70% higher was the perceived ambiguity over when the Fed may deliver those 2025 rate cuts. Fueling that timing uncertainty, Fed Chair Powell reiterated his recent message that the Fed will be more cautious about further cuts.

The other response we saw to those comments was the recalibration in the CME FedWatch Tool, which now shows just one rate cut next year. That’s one fewer than the Fed telegraphed for 2025. As we think about that, if in the coming months we see inflation get back on track toward the Fed’s 2% goal, we’re likely to see the market get re-energized about the potential for more rate cuts. We’ll continue to follow the data closely and the findings as well as implications with you.

So, while the market got what it wanted, it also received a fresh bout of uncertainty, something it is no fan of. That led to what we would call indiscriminate selling, regardless of fundamentals and positive tailwinds. With the market short-term oversold, that suggests we could see a similar market situation as we saw in early August and, to a lesser extent, in early September.

That has us eyeing potential opportunities for the Portfolio. Back in August, we used that excessive market pressure to pick up shares for the Portfolio and to start a few new positions, including the one in Meta Platforms META. As we explain below, the name of the game near-term is being selective.

Inflation Back in Focus, November PCE Data on Friday

At the same time, we have to be mindful of Powell resetting the focus for the Fed back on inflation. We’ve talked about the last few months of data not moving in the right direction. During his afternoon press conference, Powell clearly stated that the central bank really wants to see more progress on inflation, especially with year-over-year figures, before delivering additional rate cuts.

The next batch of fresh inflation data will be released on Friday when the November PCE Price Index data is published. Market expectations see the headline PCE Price Index rising to 2.5% from 2.3% in October and the core figure for November is expected to tick higher to 2.9% from 2.8% the month before.

Because we are fresh from the Fed meeting, higher-than-expected figures will lead to more speculation of rate cuts coming later in 2025. That one rate cut depicted by the CME Fed Watch Tool mentioned above is currently expected to occur at the Fed’s March policy meeting.

Gaming it out, should we see a meaningful surprise lower with the November figures, that could be enough to bring the market out of this current funk. Friday is also one of the four “Triple Witching” days in the market, during which we could see greater than usual volatility and volume as traders close out or extend their positions.

Government Shutdown?

To this mix we can also add uncertainty as to whether a government shutdown will be averted later this week. If measures to keep the government open fail, a partial shutdown could begin as early as Saturday. But if the legislation passes, it will kick the next funding fight until mid-March. Complicating matters, president elect Trump and team are pushing for a streamlined spending bill but increase the debt ceiling.

The Name of the Game Is to be Selective

While tempting to put capital to work on Thursday following Wednesday's dramatic sell-off, we’re more inclined to make more selective moves than widespread ones as we look to avoid the risk of a potential dead cat bounce. Should tomorrow's PCE data show a pleasant surprise, it may lead us to make some additional moves.

We will also be keeping a close watch on key support levels and other technical factors as we make these decisions. As we did in August, any moves we make will be to position the Portfolio for the coming quarters.

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At the time of publication, TheStreet Pro Portfolio was long META.