Market Pulls Back in December as Investors Focus on Inflation and Interest Rates Again

The market struggled in December with all major indexes declining.  After the initial bump in the week following the presidential election, investors turned their attention to economic issues again.  The election bump was strong, but it did not last very long.   

The S&P 500 peaked on December 6th at 6,090 points, an all-time high.  It traded back and forth for the next seven trading days and then the Federal Reserve Open Market Committee met for the last time in 2024 on the 17th and 18th of December.  They voted to cut the short term Fed funds rate another 0.25%.  This was widely anticipated, but it was the chairman’s comments in the press conference which disappointed investors.   He softened his stance on the number of interest rate cuts in 2025.  He repeatedly pointed to inflation as the overriding concern of the committee.  He said inflation did not cool as expected in the fourth quarter, rather it actually increased its pace.   And, the projection for 2025 is that inflation will remain challenging and we may continue to see the rate of inflation increase.   The S&P 500 declined -3% on December 18th following this news.  

In contrast to the rate cut decisions of the Federal Reserve, the yield on bonds has moved up since the Fed cut short term rates a half a percent in September.  The yield on the 10 year US Treasury peaked at 4.6% on December 26th.  It has since pulled back slightly to 4.55%.  Last year it topped at 5% in April.  The bond market is communicating continued concern about inflation and the message is that interest rates will remain higher.  Bond yields are likely to remain above 4% for now.  It seems likely that the Federal Reserve will get in step with the bond market rather than vice versa.  

The Dow had its longest losing streak in years with ten consecutive down days starting December 5th.  It is now back to its November 5th close.  The S&P 500 is trading about mid-way between its November 5 close and its November 6 post election day close.   Both indexes are trading in an area where they could find support.  Holding support here and moving higher could be confirmation of a healthy consolidation and year-end profit taking.  Breaking support here could indicate further down-side to come.   

It is hard to sit through a pull-back, especially after a very strong year.  Remember this is but a small slice in time. This will pass.    Investors need to digest the monetary policy of the Federal Reserve relative to inflation and interest rates.   There is concern about potential tariffs and the impact that could have on inflation.  During a transition, the market can be volatile.  

Our position remains that inflation is persistent and interest rates will remain higher than over the past two decades.  That guides our stock selection and asset allocation decisions.  

Written by Connie C. Guelich, CFP, AEP, CLU, ChFC. This represents our views at the time of this writing, and it is subject to change. It is not intended to be personal investment advice. If you would like to discuss your own account, please don’t hesitate to call us.