Market stumbles on Fed

A stock market pause morphed into a pullback last week as traders and investors gave a thumbs down to the Fed’s last policy meeting of the year.

The S&P 500 (SPX) posted its second-biggest one-day decline of the past two years last Wednesday, falling to its lowest level in more than a month. But Friday’s rebound (in the wake of cooler-than-expected inflation data) took a big bite out of the sell-off:

The headline: Stocks slide post-Fed, bounce post-inflation.

The fine print: Last Wednesday’s 0.25% rate cut surprised no one, but the markets appeared to be disappointed the Fed was expecting to cut rates only twice next year—down from the four cuts they had forecasted as recently as September.

The number: 2.8%, the year-over-year increase in the Fed’s preferred inflation gauge, the core PCE Price Index. That was unchanged from the previous month, but less than the 2.9% estimate. On a month-over-month basis, the PCE increased less (0.1%) in November than it did in October (0.3%).

The moves: The Cboe Volatility Index’s (VIX) 11.75-point jump last Wednesday was its second-largest one-day percentage gain (74%) on record. Last Thursday the benchmark 10-year Treasury yield hit its highest level (4.57%) since May 29 before closing the week up 12 basis points at 4.25%.

The scorecard: The Russell 2000 (RUT) small-cap index took the biggest step back:

Sector returns: The strongest S&P 500 sectors last week were tech (-1.1%), utilities (-1.7%), and financials (-2%). The weakest sectors were energy (-5.8%), real estate (-4.8%), and materials (-4.3%).

Stock movers: Quantum-computing stocks (and stocks with “quantum” in their names) were conspicuous last week. Quantum Computing (QUBT) +65% to $11.08 on Monday (then +52% to $16.79 on Tuesday, +53% to $25.68 on Wednesday, and -41% to $15.14 on Thursday), Arqit Quantum (ARQQ) +25% to $33 on Tuesday (and -27% to $26.93 on Thursday), Quantum (QMCO) +153% to $60.02 on Wednesday (then -40% to $ 36.03 on Thursday).

Futures: February WTI crude oil (CLG5) extended its consolidation, logging a 10th-straight “reversal week” by falling $1.36 to $69.46 for the week. February gold (GCG5) tumbled below $2,600 last Wednesday, but bounced to end the week down $30.70 at $2,645.10. Week’s biggest gains: January natural gas (NGF5) +14.3%, January VIX (VXF5) +12.2%. Week’s biggest declines: December ether (ETHZ4) -12.35, March soybean oil (ZLH5) -7.2%.

US markets will be closed on Wednesday for Christmas, and stock trading will close early (1 p.m. ET) on Christmas Eve. This week’s numbers include:

●Monday: Chicago Fed National Activity Index, Consumer Confidence
●Tuesday: durable goods orders, new home sales, US equity markets close early (1 p.m.)
●Wednesday: markets closed for Christmas
●Thursday: weekly jobless claims
●Friday: trade balance in goods (advance), retail and wholesale inventories (advance)

This week’s earnings include:

●Monday: Limoneira (LMNR)

Check the Active Trader Commentary each morning for an updated list of earnings announcements, IPOs, economic reports, and other market events.

“Subtle signals from the VIX” discussed ways the Cboe Volatility Index (VIX) can sometimes highlight potential stock market weakness, but noted the widely watched “fear” gauge usually gets more attention when stocks are selling off.

The way they did last week, for example. Last Wednesday marked the VIX’s 14th-biggest one-day point jump (11.75) in history, and its 74% gain trailed only the 115.6% leap on February 5, 2018.

After closing slightly lower on Thursday, the SPX rallied strongly on Friday, which may have prompted some traders to think the worst of the volatility was in the rearview mirror. Looking at the other times the VIX jumped 50% or more in one day, more often than not, the SPX continued dropping less than one week after the initial sell-off day, and rebounded to close above the close of the sell-off day in less than two weeks:¹

For example, on August 5 (bottom row) the VIX jumped nearly 65% as the SPX fell 3%. But that turned out to be the low of the sell-off—the SPX closed higher the next day and has yet to trade below the sell-off day’s close. At the other end of the spectrum, after the August 2011 and July 1990 sell-off days, it took the SPX several weeks and months, respectively, to turn higher.

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¹ All figures reflect S&P 500 (SPX) and Cboe Volatility Index daily prices, 1990–2024. In the table, “days” refers to trading days, not calendar days. Supporting document available upon request.