Stocks rebounded this week, ending a 3-week losing streak. . Market volatility eased, with the CBOE VIX and bond volatility declining. The market correction felt like capitulation, helping to spark this week’s rebound, but the oversold conditions might be overstated due to the low volatility world we have come from. Ultimately, economic data will decide how long the current market drawdown lasts.

The stock market selloff extended into a third week, with the S&P 500 falling nearly -4% and entering correction territory (-10% below its February peak). Selling pressure remains on mega-cap stocks, with the Nasdaq 100, Growth factor, and Magnificent 7 leading the decline. The Low Volatility, Value, and Equal Weight factors outperformed the S&P 500, while defensive sectors outperformed cyclical ones.

What’s Behind the Market Selloff? First, momentum stocks that led the 2024 rally are now experiencing a sharp reversal. Second, investor exposure to the stock market was high entering 2025. Third, optimism around the Trump administration’s pro-growth policies has given way to concern, with worries that spending cuts and the uncertainty created by tariffs will slow economic growth.

Stocks traded lower in a late-month sell-off as sentiment weakened. The S&P 500’s decline erased most of its post-election gains, which expectations for stronger growth and deregulation under the new administration had driven. Smaller companies underperformed, with the Russell 2000 ending the month more than -10% below its late November peak. Under the surface, the January market rotation continued as last year’s outperformers lagged. The Magnificent 7, a group of mega-cap tech stocks that drove most of 2024’s gains, fell by -8% and dragged down the Nasdaq 100, the Large Cap Growth factor, and the S&P 500.

This week, the S&P 500 fell 1.63% over the shortened week, capped by a Friday sell-off after consumer sentiment disappointed expectations, long-term inflation expectations have been at their highest since 1995, and the South China Morning Post reported a new coronavirus. Treasury yields dropped moderately over the week due to speculation about the timing and pace of interest rate cuts from the Federal Reserve Bank.

In recent years, the Federal Reserve carried out one of the fastest rate-hiking campaigns in history to bring inflation down from a multi-decade high. After holding rates high for over 12 months, the central bank started its current rate-cutting cycle in late 2024, lowering rates by a total of -1% between September and the end of December. Where do things stand now?

This week, the U.S. stock market remained range-bound, with major indexes trading sideways. The S&P 500 gained 0.5%, while smaller companies underperformed, as the Russell 2000 declined by over 1%. After months of sideways movement, the S&P 500 continued to hover around its 50-day moving average. Economic data showed that unemployment fell to 4.0% in January, the lowest since May 2024. Meanwhile, the Consumer Price Index (CPI) rose 0.5% month-over-month, marking the fastest increase since August 2023, with broad-based price gains across categories.

Stocks traded higher to start 2025, but there was a change in market leadership as the rally broadened. Large Cap Value, which underperformed over the past 12 months, outperformed Large Cap Growth by over +2.5% in January. Likewise, the Dow Jones Index traded back toward its all-time high from early December after finishing the year in a downtrend. In contrast, the Growth factor, Nasdaq 100, and Technology sector each underperformed the S&P 500 after propelling the index higher throughout most of 2024.

This week, there was limited dispersion across markets for the second consecutive week despite the volatile response to economic data. The Russell 2000 slightly outperformed the S&P 500, while the Nasdaq and international stocks were flat. Underneath the surface, factor trends saw Momentum, Value, and Equal Weight outperform the S&P 500. Notably, the Magnificent 7 underperformed, dragging down the Growth factor and Tech sector. Sectors experienced significant dispersion. Energy gained +5.8% as oil prices rose, with the Material and Industrial sectors close behind. Bonds ended the week with modest gains despite the round trip in Treasury yields.

The S&P 500 currently trades at over 21 times its next 12-month earnings estimate, a level not seen outside of periods like the late-1990s tech boom and the recent post-COVID recovery, when interest rates were near zero. Why do high valuations matter? History shows that while valuations have a limited impact on short-term returns, they play a critical role in determining long-term performance.

This week, the stock market traded higher in a shortened week. The Large size factor marginally outperformed, with the Nasdaq and S&P 500 gaining +1% and +0.8%, respectively, compared to the Russell 2000's +0.3%. The Fed's December meeting minutes contributed to the rise in the back end of the Treasury yield curve, with officials noting still-elevated inflation, strong consumer spending, and solid labor market dynamics.

There was no shortage of market-moving events in Q4. The stock market opened the quarter with a slow start in October, but the presidential election's outcome triggered a broad rally in November. The rally faded as the year ended, although the S&P 500 traded only a few percentage points below its all-time high. The credit market was equally active in Q4, with the Federal Reserve cutting rates by another -0.50%. However, the major development was the changing 2025 outlook. Both the Fed and the market expect fewer rate cuts in 2025 compared to the end of Q3, which resulted in a sharp rise in Treasury yields in Q4.

This week, the Federal Open Market Committee (FOMC) concluded its final monetary policy meeting of 2024 by lowering the federal funds rate by 0.25 percentage points to a range of 4.25%-4.50%. This was the third consecutive rate cut, reducing the benchmark short-term rate by a full percentage point over the year. While the rate cut was widely anticipated, the central bank adopted a more hawkish outlook than Wall Street had expected, scaling back its 2025 rate cut projections from four to two. This cautious approach likely reflects the sticky inflation readings this fall, which showed a modest uptick in price growth.

The past two years have been remarkable for investors, with the S&P 500 posting back-to-back gains of over +20%. The chart below looks at 2024’s price movement and uses yellow shading to mark the days when it closed at an all-time high. Since late January 2024, the S&P 500 has set over 50 new highs this year.

This week, the Bureau of Labor Statistics released the latest inflation data, following recent updates on consumer and producer prices. While November's consumer price index (CPI) and producer price index (PPI) largely met expectations, both showed persistent upward pressure, disappointing Wall Street. We anticipate the Federal Reserve will respond by lowering short-term interest rates at its December 17-18 meeting, likely by 25 basis points to a range of 4.25%-4.50%.

The US presidential election results fueled November’s stock market rally as investors focused on the incoming administration’s policy agenda and its implications. With Republicans taking control of the White House, Senate, and House in January, the following section discusses key policy areas to watch and potential market and economic impacts.

This week, the Dow Jones Industrial Average has risen 1%, bringing its November gains to over 7%—its strongest monthly performance since November 2023. Meanwhile, the broader S&P 500 Index and the tech-focused Nasdaq Composite have gained 0.5% and 0.4%, respectively. Recent sentiment suggests the central bank might pause rate hikes again as the economy maintains strong growth, potentially reigniting inflation. However, we anticipate the Federal Reserve will lower the benchmark short-term interest rate by 0.25% at the December FOMC meeting, concluding on December 18, likely postponing a federal funds rate pause until 2025.

The SECURE 2.0 Act contains strong tax credits for small businesses that start retirement plans (401(k), SEP or SIMPLE IRAs). These credits reduce costs substantially, making retirement benefits possible for small employers.

This week, the US stock market experienced a positive week, with the S&P 500 rising 1.8%, recovering from last week’s decline. Economic data releases included the S&P Global US Composite PMI, indicating that business activity expanded in November and existing home sales rebounded, showing a monthly increase of 3.5% The market remained cautious about geopolitical tensions, but strong earnings and expectations of a stable economic outlook supported the overall sentiment.

This week, the stock market remained relatively flat following election-driven gains from the previous week. The S&P 500 posted a modest decline, while the Russell 2000 fell nearly 2%, a sharp contrast to its 8.6% surge last week. Remarks from Federal Reserve Chairman Jerome Powell sparked concerns that the central bank may take a more cautious approach to cutting short-term interest rates. Additional inflation data is expected before the Fed’s mid-December policy meeting.