Mid-week market update: Coming into the December FOMC decision, I was worried that the market might react negatively on the prospect of a hawkish rate cut. Ahead of the meeting, the Committee was highly divided and the potential for a divided decision was extremely high.
As it turns out, the level of hawkishness had already been priced in. There were only three dissents on the quarter-point rate cut decision. One was for a half-point cut (Miran), and two not to cut, which was a lower degree of hawkish dissent than expected. Moreover, the dots in the dot plot wasn’t that different compared to September.
As well, the Fed announced a “QE but not really QE” operation of purchasing mainly T-Bills to facilitate an ample level of banking liquidity. We can argue whether really represents another round of quantitative easing, but the net effect is to inject liquidity into the financial system, which creates a tailwind for asset prices.
A Bullish Reaction
There were also many ways of measuring the stock market’s reaction to Fed rate decision days. When measured by different Fed Chair regimes, Powell had a tendency to spark a bearish reaction during the press conference.
The most predictive one turned out to be the forecast by Rob Hanna at Quantifiable Edges. Hanna observed that when the S&P 500 closed at a 5-day low the Tuesday before the meeting (it was a very marginal low), the S&P tended to rally strongly on FOMC day.
In the end, the market reaction was as bullish as I could expect under an optimistic scenario. The S&P 500 is now testing resistance at its all-time high, which negates the potential head and shoulders pattern that I had been monitoring.
Prepare for Year-End Rally
Now that we have gone past the potential pothole posed by the Fed rate decision, the market’s structure is highly supportive of a typical seasonal rally into year-end. We are approaching the mid-month when stock prices typically bottom and the S&P 500 is primed for liftoff.
I am also encouraged by signs of broadening breadth, which is another construtive bullish sign.
Publication Notice: I am starting a three-week break so publication will be lighter than usual. Barring unusual volatility, there will be no mid-week market updates for the remainder of 2025. Regular weekend publications will continue, though some weekends may only see one posting instead of the usual two.
Good for you Cam. It’s family time.