A Jolly Jerome Powell Delivers the Market a Christmas Present
Those expecting a 'hawkish cut' got a surprise, but here's the key question now and the big challenge for investors.
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The market was expecting a "hawkish cut" from Fed Chair Jerome Powell on Wednesday afternoon. He delivered the quarter-point cut as expected, but he was surprisingly optimistic about the economy.
While employment is softening, which is a concern, the economy is still growing strongly, driven by the explosion in data centers, and inflation is expected to be near a peak and to decline faster in the second half of 2026. There is tension between the central bank's dual mandates of controlling inflation and unemployment, which has led to some disagreements among Fed members, but everyone seems to agree that progress is being made.
Investors were worried that Powell’s message would emphasize that the Fed was still data-dependent and that the course of action was unclear. While that is still the case, he sounded quite confident that things are moving in the right direction and will continue to do so.
The market was a little uncertain at first as it digested the policy statement, but once Powell began his press conference, the buyers became more aggressive. At the close, breadth was around 70% positive, with 325 new 12-month highs, and the S&P 500 was bumping up against all-time highs with an increase of 0.8%.
Once gain, the most notable action was in small-caps. Small-cap stocks are viewed as the primary beneficiaries of lower rates, and the Fed decision triggered a solid breakout of the Russell 2000 (IWM) , which hit a new all-time high as it gained 1.5%.
The key question now is whether this is the start of the much-anticipated December rally. It would have been more effective if there had been a pullback first that shook out some folks, but that didn’t happen, which leads to FOMO and some chasing. Things are a bit extended now, but that is going to create a crowd of dip-buyers that will provide support.
The big challenge is finding good charts and putting more money to work. With small-caps leading, there will be more emphasis on stock picking and speculative trading, and that requires more trading discipline since volatility will be elevated.
I will be putting in some overtime looking for new opportunities. We have a little less than three weeks to go in 2025, and there will likely be a race to rack up additional gains.
Have a good evening. I’ll see you Thursday.
At the time of publication, Rev Shark ad no positions in any securities mentioned.
