Source: Barron's Chinese

"The long-tight rubber band has finally broken." As the stock market continues to clear excess liquidity, investors should prepare for more declines. .

The Federal Reserve’s calm predictions on the outlook for interest rates and inflation in 2025 on Wednesday (December 18) shocked the market. The market correction may have begun, but it is not yet time to panic.

Federal Reserve Chairman Powell conveyed a message that no one wanted to hear: Inflation is falling slower than expected, and interest rates are expected to be cut only twice, by 25 basis points each time, in 2025. Compared with previous predictions of more substantial interest rate cuts and statements about more progress in lowering inflation, Powell's signal on Wednesday disappointed investors.

After cutting interest rates by 25 basis points on Wednesday, the federal funds rate target range was lowered to 4.25%-4.5%. However, there are large differences within the Fed over the rate cut, with four officials opposing the rate cut.

Affected by the "hawkish" tone of the Federal Reserve and Powell's speech, the S&P 500 Index, Dow Jones Industrial Average Index and Nasdaq Composite Index fell across the board. The S&P 500's 3% drop on Wednesday was its largest drop in nearly 15 years on the day of the Fed's interest rate decision. The Dow closed down 2.6%, marking its 10th consecutive trading day lower. The Nasdaq closed down 3.6%, its worst performance since March 2020 on the day the Federal Reserve announced its interest rate decision.

Small-cap stocks, which are sensitive to interest rates, were hit even harder, with the Russell 2000 index falling 4.4%. At the same time, market volatility has risen sharply, with the VIX panic index soaring 74% to 27.62, the largest one-day percentage increase since February 2018, according to Dow Jones Market Data.

Bonds were not spared, with the 10-year U.S. Treasury yield soaring to 4.5%. The 10-year U.S. Treasury yield has risen in six of the past eight trading days and is up 0.87 percentage points from the 52-week low of 3.62% set in September.

Powell’s message is actually not that sensational, but because the market is already standing on the edge of the cliff , so it doesn’t take much force to push them off the cliff. BTIG technical analyst Jonathan Krinsky wrote in a research report on Wednesday: "Today, the already very tight rubber band broke."

Krinsky's note By now, the stock market's technical indicators have "exhausted": the number of declining stocks has exceeded the number of advancing stocks for 13 consecutive trading days, and only 8% of stocks in the S&P 500 index are above their respective 20-day moving averages. In addition, Adam Turnquist, chief technical strategist at LPL Financial) points out that only 53% of stocks are currently trading above their 200-day moving average, which is at their lows for the year.

Klinsky pointed out that high-momentum stocks had been close to collapse before, and this finally happened on Wednesday: high-momentum stocks fell nearly 6%, experiencing their worst day since May 2022. .

As stocks continue to clear excess liquidity, investors should prepare for more losses. Strategist Ed Yardeni wrote in a research note: "Today's turmoil in financial markets following the Fed's 'hawkish' interest rate cut may be the beginning of the correction we have long expected." p>

At the same time, investors are not selling blindly. Tesla (TSLA), which fell 8.3%, was not spared, but Nvidia (NVDA) fell relatively slightly, at 1.1%, reflecting that the company's stock price has fallen a lot in recent trading days.

In addition, UnitedHealth (UNH) was the only gainer in the Dow, rising 2.9%, and other health insurance companies also rose, including Cigna (CI), Centene (CNC) and CVS Health (CVS). The healthcare sector has been falling since the murder of a UnitedHealth executive, with investors appearing to think the downside is over.

There are still good reasons for investors to expect that the market can digest and respond to the more pessimistic outlook given by the Federal Reserve. First, Powell reiterated that the U.S. economy remains healthy. Secondly, the inflation rate fluctuates in the 2%-3% range and is difficult to fall further, but it is not as bad as the sharp rise in inflation that was the culprit of the stock market sell-off in 2022. Finally, there are no signs yet that corporate profits will start to decline.

It is also worth noting that the stock market is still far from a correction (a decline of at least 10%). The S&P 500 closed at 5,872 points on Wednesday, down only 3.6% from its all-time closing high of 6,090 points hit on December 6.

When technical indicators deteriorate as they have recently, it can take some time for them to recover. Klinsky noted that he could not rule out the possibility of further declines in the stock market and expected a "larger and longer decline" in early 2025.

However, corporate profits still have many supporting factors. At the same time, Trump’s deregulation and tax cut plans are expected to bring some stimulus to U.S. economic growth and help corporate profits continue to grow ( That’s assuming the tariffs don’t derail the U.S. economy and cause inflation to spike again).

Yadni, who has always been bullish, did not change his position. He wrote in a research report: "Issues such as shutdowns, dock workers' strikes, and Trump's tariffs on the first day of taking office are worrying. , may cause the stock market correction to continue until January next year. However, our target price for the S&P 500 index by the end of next year is still 7,000 points.”