On the morning of December 19th, Beijing time, U.S. stocks experienced a major downturn on Wednesday, with all three major indexes recording their biggest single-day decline of the year. The Dow Jones Index plummeted 1123.03 points, a drop of 2.58%, closing at 42326.87 points after falling for ten consecutive trading days, marking the longest losing streak since 1974. The Nasdaq Index fell 716.37 points or 3.56%, closing at 19392.69 points. The S&P 500 Index dropped 178.45 points or 2.95%, ending at 5872.16 points.
Fed's Hawkish Rate Cut Raises Market Concerns
Following a two-day monetary policy meeting, the Federal Reserve announced a 25 basis point cut in the federal funds rate target range to 4.25%-4.50%. This is the third rate cut this year, aligning with market expectations. However, the Fed's latest forecast indicates that there will be only two rate cuts in 2025, each by 25 basis points, down from four as predicted in September. This "hawkish rate cut" has undermined investors' confidence in future easing policies.
Federal Reserve Chairman Powell stated that the threshold for further rate cuts may be higher. He emphasized that the restrictive nature of current policy rates has been significantly reduced, and the Fed will evaluate future policy paths more cautiously.
Economic Assessment and Market Reaction
The Fed's statement noted that U.S. economic activity continues to expand at a solid pace, but inflation remains above the 2% target level. Labor market conditions have eased somewhat, with a slight rise in the unemployment rate but still at a low level. While the risks to economic growth and inflation targets are relatively balanced, future uncertainties are prompting the Fed to adopt a more conservative monetary policy stance.
The Fed's hawkish stance triggered a wave of market sell-offs, putting pressure on risk assets. U.S. Treasury yields soared, further exacerbating market volatility as investors shifted from high-risk assets to safe-haven assets.
Dow's Ten-Day Decline and Market Outlook
The Dow's ten-day decline is the most severe downturn since an eleven-day slump in November 1974. Prior to this, the Dow had fallen for nine consecutive trading days, the longest streak since 1978. The Nasdaq and the S&P 500 were also caught in the negative market sentiment, marking their worst performance of the year.
Analysts believe that the market is overreacting to changes in Fed policy, particularly apprehensions about the pace of future rate cuts, which have increased the selling pressure. David Kelly, Chief Strategist at JPMorgan, stated that the Fed's decisions aim to lay the groundwork for more cautious easing policies next year while minimizing potential policy conflicts with the government.
External Factors and Policy Prospects
The market is also continuing to assess the policy prospects of U.S. President-elect Trump. Trump's transition team has proposed comprehensive reform plans, including cutting support for electric vehicles while strengthening restrictions on imports of automotive and battery materials to the country. These policy changes could introduce further uncertainty to the market.
In the real estate sector, new home starts in the U.S. unexpectedly declined by 1.8% in November, with a significant drop in multi-family home construction offsetting the rebound in single-family home construction. The weak new home start data has compounded concerns about economic growth.
Summary and Outlook
The Fed's hawkish rate cut and shift in market expectations led to a major slump in U.S. stocks, particularly the Dow's ten-day losing streak, highlighting market unease about future economic policies and the pace of rate cuts. Although economic activity is solid, inflation and policy uncertainty will continue to dominate market trends. Going forward, how the Fed's policy dynamics interact with the economic plans of the Trump administration will become crucial factors influencing the market.
