US Weekly Recap: Nasdaq (1.78%), S&P (1.99%), Dow (2.25%), Russell 2000 (4.45%)

Fed Watch

Overall, the December FOMC meeting pointed to a Fed that wanted to proceed with a bit more caution on the path of rate cuts. The Fed cut rates by 0.25% to 4.25% - 4.5%. As Chair Powell noted, the Fed has already cut rates by one full percentage point, from 5.5% to 4.5%, which has brought them meaningfully closer to a more neutral rate. The Fed believes it can be more gradual on rate cuts, and it pointed to two sources of uncertainty: The path of inflation: The Fed noted that inflation has come down substantially in the last two years but still remains elevated versus its 2.0% target. The Fed continues to see inflation moderating, but at a slower pace. Its updated projections now show core personal consumption expenditure (PCE) inflation falling to 2.0% by 2027. 

Uncertainty around government policy, particularly tariffs: Powell alluded briefly to potential changes in trade and tariff policies, which could have an impact on inflation as well. However, he also noted that there are still too many unknowns around the new policies to make a definitive conclusion on inflation estimates. 

We believe the Fed's more cautious approach to rate cuts is somewhat warranted, given that inflation remains above 2.0% (although contained, in our view) and that there are uncertainties over tariff policies. However, the direction of interest rates is lower over the next 12 months. This should be supportive for both consumption and household and corporate borrowing costs. In addition, markets had already been pricing in just two rate cuts for 2025, so the Fed's update brings it in line with market expectations, though markets are now pricing in just one Fed cut in 2025, according to CME Fed Watch tool. In our view, with this reset in market expectations, the Fed now has more room to surprise markets with more cuts than anticipated, which could support market sentiment as well.

WealthTrust Long Term Growth Portfolio Weekly Top 10

Market Performance and Sector Dynamics

The week revealed notable underperformance in sectors like energy, real estate, and materials, which succumbed to rate pressures and weakening industrial demand. Housing-related equities and REITs also faced downward pressure, reflecting sensitivity to rising yields. Conversely, specific industries like airlines, apparel, and quantum computing experienced relative strength. Quantum computing, in particular, saw outsized gains, underscoring the rising interest in transformative tech narratives.

Treasury markets saw the yield curve steepen, reflecting mixed investor sentiment. The 10-year yield rose significantly over nine sessions before easing slightly. Meanwhile, the U.S. dollar continued its robust performance, marking gains against major currencies, notably the yen, influenced by the Bank of Japan's dovish stance.

Key Drivers: Fed and Fiscal Policy

The December FOMC meeting was pivotal, shaping the week’s sentiment. While a widely anticipated 25-basis-point rate cut materialized, the tone leaned hawkish. Adjustments to the Fed’s language suggested a cautious approach moving forward, with updated projections signaling fewer rate cuts in 2025. Chair Powell's measured commentary reaffirmed the Fed’s vigilance on inflation risks.

Simultaneously, fiscal policy debates amplified uncertainty. A looming government shutdown added pressure, though analysts minimized its immediate economic impact. The bigger concern remains the potential implications for broader legislative agendas in the coming year.

Economic Indicators: Encouraging Yet Mixed

Economic data painted a somewhat optimistic picture. Retail sales outpaced expectations, bolstered by vehicle sales, while consumer sentiment reached its highest level since April. Inflation readings were softer, hinting at continued disinflationary trends. However, areas like housing starts and manufacturing showed signs of strain, tempering the overall bullish narrative.

Corporate Highlights: Winners and Laggards

On the corporate front, a divergence in performance stood out. Decliners like Lennar (LEN) and Micron (MU) faced headwinds from earnings misses and sector-specific challenges. Vertex (VRTX) saw sharp declines following disappointing trial results. On the flip side, standout performers included Darden Restaurants (DRI), buoyed by robust results at Olive Garden, and Teva Pharmaceuticals (TEVA), which rallied on positive clinical data. Quantum computing firm Qubt (QUBT) stole the spotlight, gaining over 160% amid sector enthusiasm.

Looking Ahead

Next week’s market activity is expected to be subdued, given the holiday-shortened schedule. Key economic releases include consumer confidence and new home sales, but major earnings announcements and Fed commentary will be absent. Investors should use this lull to recalibrate portfolios, keeping an eye on macroeconomic shifts and evolving corporate narratives.

Final Thoughts: Balancing Opportunity with Caution

The current market environment presents a complex mix of opportunities and risks. Factors like potential Fed easing, a resilient U.S. consumer, and advancing technology offer compelling reasons for optimism. Yet, caution is warranted amid a hawkish Fed tone, geopolitical concerns, and deteriorating market breadth.

Staying agile and informed is paramount. Leveraging diversified strategies and maintaining a long-term perspective will be key as we navigate the uncertainties ahead.

I hope you have a relaxing weekend and an enjoyable holiday season.