Weekly Economic Update: December 23, 2024

You're a Mean One Mr. Powell

Federal Reserve Chair Jerome Powell played the Grinch last week by signaling the Fed would be less aggressive in its approach to lowering interest rates in the coming year, even though it delivered an anticipated quarter-point (0.25%) cut at the final meeting of 2024.¹ With inflation still stubborn and the economy still strong, all the rate-cut hopefuls in Whoville were disappointed because “expectations” (more below) were for at least another 1% in cuts in 2025. Those expectations were cut in half after Powell’s comments.

Understandably, as soon as the market caught wind that Powell was making off with the Fed eating “roast beast,” we had a one-day sell-off of epic proportions. “I think we’re in a good place, but I think from here it’s a new phase and we’re going to be cautious about further cuts,” Powell said. He might as well have said, “They’re just waking up! I know just what they’ll do! Their mouths will hang open a minute or two — then the Whos down in Whoville will all cry boo-hoo!”

Cry boo-hoo the market did: Not only did the Dow slide over 1,100 points and close down for the 10th day in a row (something we haven’t seen since the 1970s), but the S&P 500 tumbled downward by over 2.95% and the Nasdaq fell an eye-popping 3.56%.²

The possibility of a partial government shutdown didn’t help.³ Typically, the markets overreact in response to really massive news, both good and bad, and then things come back to earth the next day. That didn’t happen last week; in fact, markets lost any and all momentum they had earlier in the Thursday session and things looked truly glum.

But every day offers a new opportunity. When the personal consumption expenditures (PCE) report — the Fed’s “preferred” measure of inflation — showed a decline in November after its increase in October, the markets were back in full swing.⁴ That ended a miserable few days on an upbeat note and recouped a good portion of Wednesday’s losses.

By Friday, the markets decided that things were altogether not that bad and made the best of things because “Christmas Day will always be just as long as we have we.”⁵ I doubt Powell’s heart will grow three times its size in 2025, but the markets have very quickly convinced themselves that we can expect more than just 50 basis points (0.50%) in cuts next year. Do we risk the potential for disappointment once again? Maybe — but let’s enjoy the holidays for now and cross that bridge when we get to it.

The problem with expectations

Expectations are a funny thing. We tend to overemphasize the things we want to happen versus what can realistically happen. Let’s look at where things stand right now: Third-quarter gross domestic product (GDP) was revised from 2.8% to 3.1% this week.⁶ That’s great. Job growth is slowing but still strong, and inflation is sticking above the Fed’s target 2% level.⁷ Add to that our massive deficit, national debt and a bond market that’s unconvinced inflation and our fiscal situation is under control, as evidenced by the 10-year treasury yield.^8,9,10

What does all this give us? Absolutely no reason for the Fed to become more aggressive in cutting rates. But that’s what we as people do: We start constructing scenarios that make us feel better about piling into a stock market that appears to be going in only one direction. We also decided we were going to get more rate cuts next year, but does the data warrant it? Not really — but the markets seem to think so.

So when Powell poured cold water on those “expectations,” the fall from grace was abrupt. Markets did recover some of their equipoise by week’s end, but we should be careful about narratives that paint a too-perfect picture, understanding events will constantly force us to consider the things we discount and make it necessary to assign the appropriate weight to them in our planning.

Last week gave us a dose of volatility we haven’t had in quite a while. We also got a stark lesson in managing “expectations,” which can spiral into delusions and make us do silly things with our investments when unchecked by reality. This is why you make a plan, invest for the long term, rebalance regularly and avoid getting emotional when there are short-term market gyrations. Take a deep breath and stay focused — it should all pay off in the long run.

Coming this week

• It will be a light week with the Christmas holiday. Markets will be closed on Wednesday but will also be very lightly traded on Tuesday and as we close out the week.
• We will see some data this week, including consumer confidence (Monday), new home sales and MBA mortgage applications (Tuesday), unemployment claims (Thursday) and retail/wholesale inventories (Friday).
• Congress narrowly avoided a government shutdown over the weekend, agreeing to funding through mid-March. Thankfully, we don’t have that to contend with over the holidays.

Sources:

1 Marc Jones, et al. Reuters. Dec. 18, 2024. “US Federal Reserve Rate Cut: Powell caution about ‘further cuts’ sent stocks diving.” https://www.reuters.com/world/us/us-federal-reserve-interest-rate-decision-live-2024-12-18/. Accessed Dec. 21, 2024.

² Brian Evans and Lisa Kailai Han. Dec. 18, 2024. “Dow tanks by 1,100 points, posts first 10-day losing streak since 1974: Live updates.” https://www.cnbc.com/2024/12/17/stock-market-today-live-updates.html. Accessed Dec. 21, 2024.

³ Lexie Schapitl, Barbara Sprunt and Claudia Grisales. NPR. Dec. 21, 2024. “Senate passes stop-gap spending bill, preventing a government shutdown.” https://www.npr.org/2024/12/20/nx-s1-5235273/government-shutdown-disaster-aid-trump-debt-ceiling. Accessed Dec. 21, 2024.

⁴ Bureau of Economic Analysis. Dec. 20, 2024. “Personal Income and Outlays, November 2024.” https://www.bea.gov/news/2024/personal-income-and-outlays-november-2024. Accessed Dec. 21, 2024.

⁵ Dr. Seuss. 1957. “How the Grinch Stole Christmas.” https://www.youtube.com/watch?v=DHBswVAjfJQ. Accessed Dec. 21, 2024.

⁶ Bureau of Economic Analysis. Dec. 19, 2024. “Gross Domestic Product (Third Estimate), Corporate Profits (Revised Estimate), and GDP by Industry, Third Quarter 2024.” https://www.bea.gov/news/2024/gross-domestic-product-third-estimate-corporate-profits-revised-estimate-and-gdp-1. Accessed Dec. 21, 2024.

⁷ U.S. Bureau of Labor Statistics. Dec. 11, 2024. “Consumer Price Index Summary.” https://www.bls.gov/news.release/cpi.nr0.htm. Accessed Dec. 21, 2024.

⁸ FiscalData.Treasury.gov. “What is the national deficit?” https://fiscaldata.treasury.gov/americas-finance-guide/national-deficit/. Accessed Dec. 21, 2024.

⁹ Peter G. Peterson Foundation. “What is the National Debt Today?” https://www.pgpf.org/national-debt-clock/. Accessed Dec. 21, 2024.

¹⁰ CNBC. “U.S. 10 Year Treasury.” https://www.cnbc.com/quotes/US.10. Accessed Dec. 21, 2024.

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