Market Pullback: Fed Policy and Economic Data in Focus

Wall Street Suffers Worst Week Since September

US stock market faced a significant downturn this week, marking their worst performance since early September. This came on the heels of a historic rally in which the S&P 500 surpassed the 6,000-point milestone for the first time.

While the initial post-election rally was fueled by positive sentiment, the market quickly shifted its focus to concerns over economic data and Federal Reserve policy.

Slightly elevated consumer and producer inflation figures added pressure, alongside comments from Federal Reserve Chair Jerome Powell, who signaled a more cautious approach to rate cuts.

On Friday, these factors weighed heavily on market sentiment, dampening expectations for a December rate cut. According to the CME FedWatch Tool, the probability of a 25-basis-point rate cut dropped from 72% a day earlier to around 60%.

Despite this week’s decline, the S&P 500 remains modestly higher than its closing level on Election Day.

Weekly Market Performance

For the week:

S&P 500 fell by -2.1%
Nasdaq Composite declined by -3.1%
Dow Jones Industrial Average dropped by -1.2%

Friday’s Closing Levels

Index	Close	Change	% Change
Dow Jones	43,444.99	-305.87	-0.70%
S&P 500	5,870.62	-78.55	-1.32%
Nasdaq	18,680.12	-427.53	-2.24%
US 10-Year Yield	4.439%
VIX	16.14	+1.83	+12.79%

The Market Pullback: What’s Next?

This week’s pullback aligns with expectations voiced last week, following the milestones hit by the S&P 500, Dow, and Nasdaq. However, the reasons behind the selling are multifaceted.

One key factor was concerns over questionable appointments in former President Trump’s cabinet, which raised eyebrows among investors. The larger story, though, was Powell’s remarks signaling that the Fed is in no hurry to cut rates further.

While similar comments from Powell in the past failed to disrupt the market rally, this time investors appeared to be seeking reasons to take profits—and they found them.

Will the Selling Continue?

The question on everyone’s mind: Will the selloff continue?

The short answer: Maybe.

Here’s why:

The market has broken through key support levels, and there’s been a noticeable increase in put buying.

If the selling continues, the market could fall into negative gamma territory, which has the potential to intensify the downward momentum.

However, there’s also reason for optimism. A larger pullback could provide better entry levels for investors, and the broader market remains in an uptrend. Once the selling subsides, we could see buying momentum push prices back toward new highs.

The Importance of Fear and Momentum

Right now, the market mood is negative. This means any negative news is likely to amplify fear—and as we all know, fear tends to be twice as powerful as greed. It’s crucial for investors to remain prepared and agile in this environment.

At the same time, it’s worth keeping an eye on a potential bounce-back. History has shown that market dips often attract dip buyers, and a shift in momentum could quickly turn the tide back in favor of the bulls.

Source: CBOE, Bloomberg

This commentary is written by James Gomes, a seasoned finance industry veteran with extensive experience of over 30 years, including a substantial tenure at a reputable US bank exceeding 20 years.

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