US stocks rally after weak trading

After two straight losing sessions, US stocks ended the week on a positive note, as encouraging inflation data and comments from Federal Reserve officials eased investor concerns about future interest rate moves.

Inflation is slowing: Key data

The published Personal Consumer Expenditure (PCE) index, one of the main indicators of inflation, showed an increase of 2.4% year-on-year in November. This figure was slightly lower than economists' forecast of 2.5%. This result strengthened hopes that inflationary pressures continue to subside despite the resilience of the economy.

Consumers continue to spend

Consumer spending data showed an increase in November, which was further evidence of the resilience of the US economy. This fact, despite subdued inflation, supports confidence that demand remains stable.

Rate expectations are shifting

The publication of fresh data led to a change in market sentiment. Now traders are forecasting the first cut in the Fed's key rate in March 2025, and the second in October of the same year. Previously, the probability of a second cut before the end of 2025 was estimated at only 50%.

At the same time, on Wednesday, the Fed announced a third rate cut this year. However, according to the updated economic forecasts (SEP), the Fed expects only two rate cuts of 25 basis points in 2025, instead of the four announced earlier in September. This more conservative approach reflects the continued resilience of the economy and the difficult situation with inflation.

Market reaction: sell-offs and recovery

The Fed's announcement triggered a wave of selling on Wednesday evening, from which the market was unable to recover even on Thursday. However, Friday's rally partially offset the losses. Despite this, the main US stock indexes - the Dow Jones, S&P 500 and Nasdaq - showed an overall decline for the week.

The role of fiscal policy

Uncertainty about fiscal policy, including the possible impact of tariffs, also received attention from Fed officials. Some of them acknowledged that they have begun to factor these risks into their forecasts. Such an approach may influence the regulator's further actions, adding another factor to the equation of economic stability.

Market Correction: Experts Say

"It's pretty obvious what's happening — it's just that this PCE plus the dovish comments from the Fed have offset the market's overreaction to the hawkish cut that everyone was expecting," said Jay Hatfield, CEO of Infrastructure Capital Advisors in New York.

He added: "We've seen this about 10 times during this Fed cycle. The market just always overreacts to one side or the other."

Key Indexes Are Gaining

The Dow Jones Industrial Average (.DJI) added 498.82 points, or 1.18%, to 42,841.06. The S&P 500 (.SPX) rose 63.82 points, or 1.09%, to 5,930.90. The Nasdaq Composite (.IXIC) added 199.83 points, or 1.03%, to close at 19,572.60.

The Dow and S&P both saw their biggest gains in a single day since Nov. 6.

A Week of Controversy

However, all three major indexes ended the week lower overall. The S&P 500 lost 1.99%, the Nasdaq lost 1.78%, and the Dow fell 2.25%. The Nasdaq ended a four-week winning streak, while the S&P 500 posted its biggest weekly loss in six weeks. The Dow also fell for a third straight week.

Sectors on the Rise

Despite the weekly decline, all 11 major S&P sectors posted gains on Friday. Real estate (.SPLRCR) led the way, rising 1.8% as Treasury yields fell. The broad rally showed investors are willing to return to active buying despite recent wobbles.

Small-caps: New prospects

Small-cap stocks tracked by the Russell 2000 (.RUT) rose 0.9%. These assets often benefit from a lower interest rate environment, making them an attractive choice for investors in the current environment.

Congress Averts Crisis

Investors were closely watching developments in the U.S. Congress on Friday, which took steps to prevent a partial federal government shutdown. House Republican leaders said they would vote to keep the government open, adding stability to the market.

Broad Gains in Stocks

Advance stocks outnumbered decliners 2.84-to-1 on the New York Stock Exchange on Friday, while the Nasdaq outnumbered decliners 2.12-to-1. The S&P 500 posted three new 52-week highs and 23 new lows, while the Nasdaq posted 51 new highs and 233 new lows.

Triple Witchcraft and Volume Boost

Friday's session was made special by the simultaneous expiration of quarterly equity, index option, and futures derivatives contracts, known as the "triple witchcraft." This event significantly boosted trading volume, which totaled 21.58 billion shares, well above the 14.87 billion average over the past 20 trading days.

December's Challenges: Looking Ahead

December has so far disappointed investors, turning out to be one of the most challenging months for the market in an otherwise strong 2024. The S&P 500 has gained 24% year-to-date, but continues to struggle. Traditionally, the last five trading days of December and the first two days of January, known as the "Santa Claus Rally," average gains of 1.3%. However, this year could see a departure from that trend.

Fed Disappointment, Sectors in the Red

The S&P 500 suffered its biggest daily drop since August on Wednesday after the Fed disappointed investors by offering a less aggressive rate cut for 2025. There are also problems beneath the surface, with eight of the 11 S&P 500 sectors in the red in December and the S&P 500 down 7%.

Rising Bond Yields and Overvalued Stocks

Another source of tension in the market is rising Treasury yields. The 10-year yield rose to 4.55%, the highest in six months. Matt Maley, chief market strategist at Miller Tabak, said the rise is putting pressure on stocks, especially with the S&P 500 trading at 21.6 times projected earnings, well above the historical average of 15.8.

Santa Claus Rally: Hopes and Reality

The Santa Claus Rally period, which covers the last five trading days of the year and the first two Januarys, traditionally brings gains to the market. Historical data shows that 90% of such periods have predicted a positive outcome for the year. However, in 2024, experts like Carlson suggest that the main gains have already occurred in November, when the market gained 5.7% amid political events.

Market Narrowing: A Warning Sign

A narrowing rally, with fewer stocks gaining, is also a cause for concern. It could mean the market is becoming less resilient, which in turn dampens investors' holiday spirits.

Tech Giants Show Strength

Some mega-cap companies continue to delight investors. Tesla (TSLA.O) and Alphabet (GOOGL.O) have shown impressive results, rising 22% and more than 13%, respectively, in December. Broadcom (AVGO.O) was another winner, with shares soaring 36% on expected strong demand for its AI chips, pushing the company's market value above $1 trillion.

Trouble Below the Surface

But such gains are becoming increasingly rare. The number of S&P 500 stocks that are falling has outnumbered those that are advancing for 13 straight sessions, the longest losing streak since 2012.

In addition, the percentage of S&P 500 stocks trading above their 200-day moving averages has fallen to 56%, the lowest in a year, according to data from Adam Turnquist of LPL Financial.

Analysts Take a Cautious Approach

"We recommend waiting for support to establish and momentum to improve before intensifying dip-buying," Turnquist wrote in a research note issued after a significant sell-off in the market on Wednesday.