The last week on Wall Street was a roller coaster of emotions, with significant fluctuations in the stock market indicesInvestors were initially rattled by the Federal Reserve's hawkish stance on interest rate cuts, leading to a dramatic drop, as measured by the Chicago Board Options Exchange's Volatility Index (VIX), which spiked to over 70%. This was compounded by concerns over a potential government shutdown and the chaotic trading environment associated with the quarterly phenomenon known as "Triple Witching," when numerous options contracts expire simultaneouslyHowever, subsequent reports on inflation helped alleviate some worries regarding future interest rates, breathing a sigh of relief into the market.

As the festive Christmas holidays loom closer, trading volumes are expected to dwindleThe outlook for the traditional year-end rally remains uncertain, especially given the onset of a new phase of negotiations surrounding interest rate pricing

The Federal Reserve's recent decisions appear to have shifted the market's expectations significantly.

Last week marked the conclusion of the Federal Reserve's meetings for the year with a decidedly hawkish approach to interest rate cutsAfter an aggressive rise in rates totaling 525 basis points in 2022, the central bank's recent moves toward easing may have reached a plateau following a cumulative reduction of 75 basis points over three consecutive sessionsThe updated dot-plot projection revealed expectations for only two cuts in 2025, a stark contrast to the four anticipated in September.

During the press conference, Fed Chair Jerome Powell referenced the phrase "magnitude and timing" in the announcement, suggesting that the Fed is nearing a moment of slowing rate cutsHe indicated that the Fed is closer to a neutral interest rate, and the deceleration reflects the economic data trends from this year

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Furthermore, he noted that the policy still carries significant restrictive implications and that a slower pace of cuts in the coming year is a response to rising inflation expectations.

Bob Schwartz, a senior economist at Oxford Economics, commented on the summary of economic projections that indicate an increase in inflation rates for the coming yearHe pointed out that the Fed seems to be operating under certain assumptions regarding trade policies, which are generally seen as stabilizing forces in the economy.

The stability of the job market, with no alarming signs emerging, contributed to the Fed's change in stanceData from the Labor Department indicated a drop in initial jobless claims to a yearly low of 220,000, while continuing claims remained below two million, indicating a healthy labor marketAs supply and demand balance out, job seekers may experience longer durations in their job search

Recent surveys have shown that some companies are considering expanding their workforce, signaling ongoing employment growth.

The rebound in long-term Treasury bonds further reflects market speculation regarding the potential for elevated interest rates next yearThe two-year Treasury yield rose by 7.3 basis points to 4.311%, while the benchmark ten-year yield climbed 23.5 basis points to 4.522%, pushing beyond the critical psychological barrier of 4.50%. Federal Funds futures suggest that the first potential rate cut could occur in June of next year.

Yet, despite the Fed's concerns over inflation, the November Personal Consumption Expenditures (PCE) Price Index came in better than anticipated, providing a glimmer of hopeMorgan Stanley's Chief U.SEconomist, Michael Gapen, suggested that PCE data supports the outlook for continued rate cuts into early 2025. Positive signals stem from a slowdown in housing inflation; this trend may become more evident once the effects of car prices related to supply chain issues ease.

According to Montreal Bank's analysis, there might be cautious cuts observed in January, even as inflation appears to be converging towards target levels

anticipations for a significant cut still lean towards the March timeframe.

Schwartz forecasted that the Fed might lower rates three times this year, although the likelihood of a March cut has diminishedHe emphasized that any decision to cut rates would be greatly influenced by tangible progress in curbing inflation unless there is a dramatic shift in the labor market.

Looking ahead toward the end-of-year trading dynamics, the aftermath of the Fed's announcement saw a sell-off in global capital marketsThe MSCI All Country World Index experienced a staggering drop of over 3.3%—the largest weekly decline since September of this year.

In the U.Sstock market, nearly all sectors faced heavy lossesResearch from the Dow Jones indicated that cyclical sectors such as energy, real estate, and materials fell by more than 4%, while tech and communication services also saw declines exceeding 2%.

Significant capital outflow marked the week, with LSEG revealing that investors sold off $50.2 billion in U.S

stock funds, the largest weekly outflow since September 2009. Furthermore, a Goldman Sachs report highlighted that hedge funds had net sold U.Sstocks for a fourth consecutive trading day, with the pace of selling being the fastest in eight months.

Danger signs flashed on market indices, notably as the Dow Jones set a record for the longest consecutive down streak in nearly 50 yearsFor the 13th day, the number of declining stocks on the S&P 500 outnumbered those that ralliedAnalysts pointed out that the concentration of the "Magnificent Seven" tech companies had skewed the index's representation, complicating the understanding of underlying performance metrics.

Nonetheless, historical data provides a glimmer of hope for forward momentumSince 1969, the S&P 500 has averaged a gain of 1.3% during the last five trading days of the year plus the first two of the following year, a period often referred to as the "Santa Rally." Moreover, according to Ryan Detrick of Carson Group, the S&P 500 has risen over 20% for two consecutive years on eight occasions since 1950; when this occurs, there is a 75% probability of a continued rise the subsequent year, with an average gain of 12.3%—notably better than the 9.3% long-term average increase.

Charles Schwab's market outlook indicated that the anticipation of the Fed holding off on cuts has likely contributed to the recent sell-off, exacerbated by the ten-year Treasury yield surpassing the 4.50% mark and the dollar index breaching 107. Investors remain wary due to prospects of higher yields and persistent inflation, despite robust data pointing to a resilient U.S