Stock Market Update Monday December 30, 2024
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Equity markets have experienced significant declines following the recent FOMC meeting, breaking the usual pattern of a "Santa Claus rally" at year-end.
Understanding the Decline:
The recent market pullback is primarily due to technical adjustments rather than fundamental changes. Profit-taking is occurring as mutual funds and institutional investors rebalance their portfolios—selling stocks that have performed well and reinvesting in those that have lagged to maintain target allocations. The S&P 500's strong 25% year-to-date gain has also provided opportunities for tax-loss harvesting, a common strategy during year-end portfolio adjustments.
Key Reasons for Recent Weakness:
Rising Long-Term Yields:
The yield on the U.S. 10-year Treasury surpassed 4.6%, peaking at 4.63%. This increase puts pressure on stock valuations as higher discount rates are applied.
Weakening Market Breadth:
Our proprietary algorithm has identified sell signals for ETFs such as RSP, IWM, and DIA, indicating a shrinking market rally that leaves major indices vulnerable.
Fundamentals Remain Strong:
Despite the recent volatility, the fundamental factors supporting the market have not changed significantly. The December FOMC meeting has tempered optimism by reducing the expected number of rate cuts in 2025 from four to two, but it still aligns with a soft-landing outlook. The Fed's adjustments reflect a careful yet positive economic environment, which continues to support the gains seen in equities earlier this year.
Macroeconomic Support: Policies promoting deregulation and lower business costs have kept investor confidence high.
Political Stability: Positive sentiment surrounding a pro-business Republican administration has bolstered market outlook.
Fed’s Balanced Strategy: A data-driven approach to monetary policy signals a commitment to avoiding severe economic downturns.
Outlook:
Although short-term volatility may continue, the prevailing trend of "buying the dips" has benefited investors throughout 2024. We believe the current market environment represents a consolidation phase rather than the beginning of a prolonged decline. As we move into the new year, these factors will likely contribute to renewed strength in the stock market.
Bottom Line:
On 09/13/2024, the SPY and QQQ ETFs, our proprietary algorithm has not triggered a sell alert. Political Stability: Positive sentiment surrounding a pro-business Republican administration has bolstered market outlook. The December FOMC meeting has tempered optimism by reducing the expected number of rate cuts in 2025 from four to two, but it still aligns with a soft-landing outlook. Macroeconomic Support: Policies promoting deregulation and lower business costs have kept investor confidence high. In January 2025, we expect at peak that will activate our proprietary algorithm for SPY and QQQ sell alerts. Our strategy emphasizes waiting for buy alerts instead of shorting indexes, with the goal of having all five indexes—SPY, RSP, QQQ, IWM, and DIA—trigger buy alerts simultaneously.
The Fed's dovish long-term outlook and the absence of a sell alert from our proprietary algorithm for the S&P 500 ETF SPY support this view. Cash on the sidelines continues to accumulate, creating potential for a strong inflow into equities. China's PBOC has introduced significant monetary easing, adding further global stimulus.
