What happened in the US markets this week?

A statistical deep dive. Rate cuts lead the downtick, but it's not all bad.

Why is the stock market down this week?

The headline story for the week has been the sudden drop in the US markets following the Federal Reserve’s indication that it will slow rate-cutting in 2025. While the S&P 500 closed down just 2.19% on Friday for the week, buoyed by a stronger inflation report in the closing days, questions linger over high rates for the coming year.

The sell-off followed Chairman Jerome Powell’s comments indicating two rate cuts for next year, or half a percentage point. He added, “I think from here it’s a new phase and we’re going to be cautious about further cuts.” With consistent rate cuts fueling a record-breaking year for large indices, what should you look out for in 2025?

S&P 500’s weekly performance, with Wednesday and Friday both showing shifts in the market. Source: WSJ

Traditional movers: rate cuts, inflation, and more

This week was exemplary of investors reacting to interest rate announcements by the Fed. Despite another cut, fears of 2025 moves led to a sharp drop on Wednesday, with investors believing higher rates could affect borrowing just as businesses bounce back. The move led some to label Powell as the “Grinch who stole Christmas.” We will explore the impact of interest rates on the market next week, so do subscribe!

Just as it looked like the holidays were ruined for some, Friday brought some respite. Inflation, measured by the Fed using the Personal Consumption Expenditure, rose by 2.4%, just shy of expectations of a 2.5% rise. This positive news led to an uptick of just over one percent in most major indices, including the S&P and the Dow Jones. With inflation still cooling, all signs point to easier monetary policy for next year, despite the Fed’s end-of-year announcement.

The drop in markets was also deeply influenced by future policy measures. For one, the US government found itself on the brink of a shutdown after a last-minute bill was scuttled by President-elect Trump and Elon Musk, leading to skepticism in the markets. However, Congress did reach a pared-back agreement in the late hours of Friday to avoid a shutdown, ensuring continued services through March.

Output Booms

With the markets down, many investors will likely be wondering if the downturn will be temporary or prolonged. Here, we can turn to less commonly cited economic indicators for the health of the underlying economy.

Output, measured by the S&P Global Flash US PMI, hit a three-year high in December, rising to 56.6, up 1.7% from November. The charge was led by the services industry, which saw its highest levels thanks to lower inflation and overall spending resilience. However, on the flip side, manufacturing PMI fell 1.7%, continuing a months-long contraction fueled by policy concerns of the incoming Trump administration.

Manufacturing companies have noted concerns about tariffs proposed by the new regime, which will engulf most of the US’ biggest trading partners such as China and Canada. Added to ongoing supply chain issues and higher costs, the index points to continued pressure for a major component of the economy.

However, the services sector continues to boom on the promise of lighter regulation and pro-business policies by the incoming administration. With January 20th less than a month away, investors are preparing for a major policy shift from the last four years that could upend years of relative continuity.

Looking ahead

The Global Flash PMI is only an example of a metric to measure the future health of the economy. Most notably, the stock market may move independently of such indicators, relying on prevailing sentiments. All that said, this week’s swing clearly shows that we have entered a new phase of economic recovery and Trump’s economic policies hold the cards for the markets.