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Instead of the Santa Claus rally in the U.S. stock market, the S&P 500 and Dow Jones Index posted declines in the last week of the year. Many point to the FOMC as the main culprit.
At its last meeting, the regulator announced another 25 bp rate cut and revised the number of future rate cuts by 2025 from four to just two, as the disinflationary trend appears to be losing steam.
With a strong economy, one might think there’s not much to worry about. However, the latest macroeconomic data shows that things are already starting to deteriorate.
Specifically, orders for manufactured goods dropped in November due to weak demand for commercial aircraft, while business spending on equipment slowed in the fourth quarter.
Adding to the concern, at least 686 companies filed for bankruptcy in 2024, up 8% from the previous year and the highest number since 2010, according to S&P Global Market Intelligence.
The only bright spot remains the labor market. Official data show that the number of Americans filing for unemployment benefits has fallen to its lowest level since March.
So why doesn’t the pessimism persist?
This week, markets started on a positive note, driven by several factors: the current AI frenzy, led by who but Nvidia, whose stock massively surged throughout the past year — and speculation that the tariff war might not escalate as much as feared.
Elsewhere, optimism about banking sector deregulation may have helped following Michael Barr’s resignation as Vice Chairman of Supervision at the Federal Reserve Board.
For those not in the know, Barr had been a leading advocate of requiring large banks to increase their capital buffers, i.e., cash and other assets readily available to absorb losses during crises.
What lies ahead will depend on a combination of factors: the trajectory of macroeconomic indicators, Trump’s policy actions, and the evolving geopolitical landscape.
While some suggest that the absence of a Santa Claus rally could lead to a bear market, such a scenario would require a significant drop in risk appetite. And funds do not seem to be pricing it in.
