The deep selloff on Wall Street that was triggered by the US Fed's hawkish commentary on 2025 interest rate trajectory could linger on longer, well into January, and the prospects of a 10% stock market correction cannot be ruled out, Ed Yardeni, President of Yardeni Research said on December 19.
"We think that the stock market might remain sloppy through January. Some investors might be planning to take their substantial profits early next year rather than now to defer capital gains taxes," Yardeni wrote in his latest blog.
"We can't rule out a 10% stock market correction, but we would view that as a buying opportunity rather than as a reason to panic out of the market since we don't expect a recession or a bear market. We are still targeting 7000 on the S&P 500 by the end of next year," Yardeni added.
The US equity markets had a severe reaction to Fed’s new dot plot, with US treasuries markets tumbling and US dollar rallying to the strongest level in over two years.
India's benchmark indices too were under selling pressure, though off lows, after the US Federal Reserve’s interest rate commentary. Nearly Rs 3.76 lakh crore worth of market capitalisation was wiped off during the first half of the trading session on December 19.
The market perception was that US Federal Reserve was stimulating an economy that was already quite strong, said Ed Yardeni, with a full 100 bps rate cut behind us in 2024 in just three FOMC meetings. That, Yardeni said, resulted in a 'melt up' in US equities, with S&P 500 higher by nearly 25% so far this year, and Nasdaq 100 up by 28% YTD. "With Fed changing its mind and suggesting it needs to slow down, the markets had a real selloff," Yardeni told CNBC-TV18 during a conversation after the FOMC outcome.
While the market reaction to the FOMC was severe, some experts said the policy outcome was not surprising. Wall Street was spooked by the 'confirmation by the US Fed that inflationary pressure was building', leading to 'changes in the dots (dot plot) to a more hawkish side', Matt Orton of Raymond James Investment said on CNBC-TV18.
During the post-FOMC press conference on December 18, chairman Jerome Powell had said, "As we think about further cuts we’re going to be looking for progress on inflation."
The other reason why Jerome Powell chose to pull back on 2025 interest rate trajectory with projections of fewer cuts could be that the Fed sees economic and earnings growth in US, while it worries over the uncertainty around potential tariff hikes under Trump 2.0 administration, added Matt Orton.
Several economists worry that Trump’s proposed plans to cut taxes, initiate deportations and impose fresh tariffs could stoke inflation. "From here on, it is going to be much harder to get rate cuts without much further improvement on inflation," Bloomberg News quoted Conrad Dequadros, senior economic adviser at Brean Capital.
Citigroup's Robert Sockin believes the next US Fed rate cut would depend on inflation and Presiden-elect Donald Trump's stance on trade tariffs. "The Fed is anticipating some upside to inflation in 2025 and is less concerned about the risk to economy," Sockin said on CNBC-TV18.
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