Market Rally vs. Fed Meeting: Is a Drop Inevitable?

Wall Street’s festive cheer appears muted as the stock market rally takes a breather ahead of the Federal Reserve’s final policy meeting of 2024. Hopes for a December surge driven by tech stocks have dimmed, raising concerns about market fragility. The S&P 500 Value Index (SPYV) extended its record losing streak, while the Dow Jones Industrial Average (DJIA) posted its seventh consecutive daily loss on Friday—the longest stretch since February 2020.

“I would love to see a meaningful pullback in equities,” said Talley Leger, chief market strategist at the Wealth Consulting Group. While Leger expects the typical year-end boost from holiday spending, he predicts some market turbulence could emerge in 2025.

The S&P 500 (SPX) closed flat on Friday but remains poised to achieve back-to-back annual gains exceeding 20% for 2023 and 2024, defying earlier fears of a recession. However, this bull market has avoided pullbacks of at least 15% since October 2022, a rarity according to Dow Jones Market Data.

David Laut, chief investment officer at Abound Financial, compared today’s market euphoria to the iconic “Titanic” scene where arms are outstretched at the bow. Despite strong investor sentiment, Laut sees growing risks, including inflation, disappointing earnings, and geopolitical tensions.

“Why not take some money off the table?” he suggested, highlighting a shift toward mid- and small-cap stocks, emerging markets, and cash reserves. Laut also recommends a 5% allocation to gold and cryptocurrencies as part of a diversified strategy.

The ‘Magnificent Seven’ Factor
One major concern is the outsized influence of megacap technology stocks, known as the “Magnificent Seven.” For every dollar invested in the SPDR S&P 500 ETF Trust (SPY), 31 cents are allocated to these stocks. Laut advocates for a more balanced approach heading into 2025, focusing on undervalued opportunities beyond large-cap tech.

Parallels to the 1990s

The Fed is expected to announce a 25-basis-point rate cut on Wednesday, but Chair Jerome Powell’s cautious tone suggests a slower pace of easing in 2025. Talley Leger draws comparisons to the mid-1990s, a period marked by robust economic growth and the early stages of the tech boom. “This feels a lot like the run-up to tech mania 1.0,” said Leger, emphasizing the importance of navigating inflation risks.

Higher bond yields add complexity to the outlook. The 10-year Treasury yield climbed significantly last week, reflecting concerns that inflation may not cool as quickly as anticipated. George Cipolloni, portfolio manager at Penn Mutual Asset Management, warned, “The market wants easing, but yields remain a challenge. Lower yields would help, but getting there won’t be easy.”

What’s Next?

The Fed’s rate decision on Wednesday will be the centerpiece of a busy week that includes November’s PCE inflation data on Friday. Other key economic reports, including updates on manufacturing, retail sales, and housing starts, will provide further insights.

Despite recent setbacks, 2024 has been a strong year for equities. The Dow is up 16.3%, the S&P 500 has gained 27%, and the Nasdaq has surged 32.7%, according to FactSet. As investors look to 2025, the focus shifts to navigating market uncertainty while capitalizing on new opportunities.