Twas the week before Christmas, and Wall Street felt dread after a surprising statement straight from the Fed.
Investors got their bells jingled big time on Dec. 18 after the Federal Reserve raised a clatter by indicating in a policy statement that it was forecasting two interest rate cuts in 2025 and not the previously projected four.
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The news hit markets like Jacob Marley rattling his chains. The Dow dropped about 1,100 points, or 2.5%, while the S&P 500 suffered its biggest post-Fed decision slide on record.
The numbers were scary enough to put the kibosh on all that holiday cheer — but some analysts don't think you should be taking down the mistletoe just yet.
"While investors were expecting the Federal Reserve to deliver a hawkish cut and telegraph a slower pace of rate cuts for 2025 when said aloud by Chair Jerome Powell, that put an exclamation point on things and prompted a knee-jerk selloff," said Carol Schleif, chief market strategist with BMO Private Wealth.
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"Markets seemed to ignore the number of times and ways that Chair Powell noted how strong the economy is," she added.
Market technician expects Santa rally
Schleif said the slower pace of Fed cuts is for a good reason, "which is that the economy is strong, and a strong economy is ultimately what matters most for stocks and earnings."
"While Wednesday's Fed decision was undeniably a hawkish cut, we believe stocks are overreacting, and that rates are at justified levels currently given the strong state of the economy and with inflation still stubborn in certain areas of the economy, such as housing, automobiles and insurance," she said.
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Schleif said the stock market's pullback was understandable, "given the steep run we have seen in stocks since the election and since the start of the year, and the fact that market breadth had been narrowing in recent days."
Markets were edging up into the green zone, with the Dow gaining 226 points, or 0.54%, at last check.
And in spite of all the Grinches, TheStreet Pro's Helene Meisler isn't giving up on a Santa Claus rally, which typically starts a few days before Christmas.
"I think there was a minor shift in sentiment after Wednesday’s move, but so many of the intermediate-term indicators were so complacent that one down day is not going to change them," the market technician and equity trader said.
She noted that 90% of the volume was on the downside.
"It took almost all day to get there but by the close we got there," she said. "That typically means we should get a bounce."
Meisler, the first-ever technical analyst for Goldman Sachs in 1989, said there wasn't a big jump in puts —option bets on lower prices — since the put/call ratio was just .85. To put that in perspective, she said, right before the election "the put/call ratio jumped to 1.3 and in August’s whack it got to 1.28.
"So, yes, I am still looking for a rally Christmas week, but I still think we will come down again after that," she said. "One down day won’t change that sentiment that got so extreme."
Veteran analyst sees great opportunities on sell-off
TheStreet Pro's James "Rev Shark" DePorre said that while overall market breadth has been running poorly for weeks, one of the most notable aspects of the market's reaction was how lopsided the breakdown was.
"Investors want to escape and dump the entire market," he said. "All stocks are punished to roughly the same degree regardless of their individual merit."
DePorre, CEO of Hammerhead Strategies, sees some bright spots amid all the lumps of coal, noting that this type of action creates opportunity.
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"Some very good stocks that weren’t expensive or technically extended were sold along with many names that are expensive and extended," he said.
"This is the sort of environment that eventually leads to great opportunities for stock pickers who can separate out the quality names."
DePorre said the market carnage occurred in the context of a very unusual technical action.
The Dow has had an exceptionally long losing streak, he said, the S&P 500 has more than a dozen straight sessions of negative breadth, and the Russell 2000 has been trending down.
Only the Magnificent Seven, the group of high-performing megacap tech stocks that includes the likes of Tesla (TSLA) , Amazon (AMZN) and Nvidia (NVDA) , has been holding up the indexes
"My game plan is to look for names that sold off too hard and are ripe for a bounce to end the year," DePorre said. "Some of these names have also been under pressure due to tax-loss selling, but that may have run its course early due to the technical action."
While it looks quite ugly out there, Rev Shark says he's very optimistic about the stockpicking opportunities at a time of year when there is often a positive market bias.
Related: Veteran fund manager delivers alarming S&P 500 forecast
