The Stock Market: Highs, Lows, and the Anticipated Fed Meeting

As we approach the end of 2024, the stock market is riding high with a remarkable 27% increase, but with the final Federal Reserve meeting of the year looming, many investors are left wondering if a correction is overdue. Year-end festivities may be upon us, but Wall Street’s anticipation of potential market turbulence is palpable.

A Breather for the Rally

Despite earlier optimism, the rally in stocks has taken a breather over the past week. Investors who were hoping for a tech-led bull market to carry through December have experienced disappointment, particularly with the S&P 500 index value stocks (SPYV) facing an unprecedented streak of losses. Adding to the unease, the Dow Jones Industrial Average (DJIA) recorded its seventh consecutive session of declines, the longest such stretch since February 2020.

In light of these developments, the conversation around a market correction has resurfaced, especially as the Fed gears up for what many expect to be another small interest rate cut. Talley Leger, Chief Market Strategist at the Wealth Consulting Group, noted, “I would love to see a meaningful pullback in equities.” While he still anticipates a year-end rally driven by holiday shopping, he cautions that 2025 might bring some turbulence.

Pullback Watch: Time for a Reality Check?

The S&P 500 closed virtually flat on Friday but is on track for back-to-back yearly gains of more than 20% in both 2024 and 2023. Such a feat is impressive, especially given the recession fears that haunted Wall Street earlier in the year. However, it is crucial to recognize that bull markets do not rise indefinitely without corrections. Since October 2022, we have not seen a pullback of at least 15%, a rarity unusual enough to warrant concern. As David Laut, Chief Investment Officer at Abound Financial, points out, “Your arms are wide open on the bow,” evoking imagery of overexuberance often seen before market downturns.

With investor sentiment buoyed by anticipated deregulation and tax cuts during President-elect Donald Trump’s second term, the risk of inflation, disappointing earnings, and other economic pressures have begun to pile up, prompting some market participants to reassess their positions. Laut advises, “Why not take some money off the table, move down the multiples spectrum?” His strategy involves focusing on mid-cap and small-cap stocks while maintaining a cash reserve for future opportunities.

The Disproportionate Growth of Mega-Cap Stocks

This bull run has been dominated by a small group of powerful mega-cap technology stocks, often dubbed the “Magnificent Seven.” In November alone, 31 cents of every dollar invested into the SPDR S&P 500 ETF Trust (SPY) was allocated to this elite group, underscoring the lopsided nature of current market dynamics. Laut emphasizes his preference for “being opportunistic” as we transition into 2025, suggesting a balanced approach that includes various sectors beyond just technology.

Cues from the ’90s: Are We in for a Repeat?

Market analysts are drawing parallels between today’s environment and the mid-1990s, a period marked by significant Fed rate cuts and the lead-up to the tech mania. The Fed, under the stewardship of Jerome Powell, has consistently stressed the importance of defeating inflation while fostering a soft landing for the economy. This week, many expect the Fed to lower its benchmark interest rate by 25 basis points, further fueling speculation on future monetary policy. However, if inflation remains “sticky,” it could lead to a more selective approach to rate cuts in upcoming meetings.

George Cipolloni, Portfolio Manager at Penn Mutual Asset Management, highlighted concerns about inflation, stating, “There are certain indicators showing inflation is not going away as quickly as hoped.” As yields rise – marked by the recent uptick in the 10-year Treasury yield – the prospect of rate cuts becomes less certain, presenting challenges for the market.

A Market Under Pressure

For context, the Dow fell 1.8% for the week, marking its most significant decline since late October. The S&P 500 shed 0.6%, while the Nasdaq Composite gained 0.3%. For the year, however, the Dow is still up 16.3%, the S&P 500 is ahead by an impressive 27%, and the Nasdaq boasts a 32.7% increase, according to FactSet.

As we move toward the Fed’s meeting and the close of the year, prudent investors must remain vigilant, balancing optimism with caution. While the prospects for the market in 2024 appear robust, the potential for volatility and corrections cannot be ignored. With the year drawing to a close, it’s essential for those at the helm of their investment portfolios to make informed decisions that reflect both market conditions and individual risk tolerance.

In this era of uncertainty, embracing traditional financial principles and recognizing the value of preparedness will help ensure that we not only weather the storms ahead but emerge stronger on the other side.