The major highlight of the week was always going to be the final Federal Reserve meeting of the year and the Fed Funds Rate decision announcement with quarterly dot plots, followed by chairman Powell’s press conference on Wednesday afternoon ET, with the expected rate cut proclamation itself probably the least interesting part of the day.
The central bank’s rate-setting committee (FOMC) has forever claimed to be highly data-dependent but was data-deprived due to the backlog of inflation and labor market reports resulting from the recent government shutdown and operating in a fog to an extent, but still strongly fancied to make another 0.25% rate cut.
With the delayed most recent Jobs Report not out until later this week, there could be two very different scenarios whereby next weekend Fed committee members are either patting themselves on the back or kicking themselves, already regretting what they have done.
Bond markets continued to be twitchy. Medium and longer term interest rates remained stubbornly higher as bond vigilantes appear to be stirring in reaction to the increasingly disturbing economic, fiscal and inflation outlook, the prospect of an ever-widening national debt and a potentially reckless and incompetent Fed 2.0 response under a Hassett chairmanship starting in May. Also, the odds of another government shutdown as soon as January 31st are non-trivialand Wall Street is starting to pay attention.
All this uneasiness spilled over into stocks when New York opened on Monday as attention drifted from how the Fed will behave on Wednesday (that was pretty much a given and already priced in) to how it might behave in 2026 and the indexes slipped into the red, further delaying any Santa Claus rally and then remained in a holding pattern for the rest of the session to close a touch lower.
As the FOMC began its two-day conclave on Tuesday, interest rates steadied and stocks initially made small gains after better-than-anticipated job openings JOLTS data for October before later drifting back and finishing the day unchanged.
Fed Day dawned on Wednesday with stocks still feeling soggy and medium/longer term interest rates starting to creep higher again, despite the assumed overnight rate cut later that day. The impactful 10 year Treasury rate, below 4.00% just a couple of weeks earlier, briefly climbed back above 4.20%.
The predictable quarter point cut in the Fed Funds Rate to 3.625% duly arrived with two of the twelve committee members voting for no rate cut at all. The dot plots indicated a median assumption of just one rate cut in all of 2026. They also forecast little change in CPI inflation over the next twelve months, expected to still remain well above the Fed’s 2% target and a light increase in both the unemployment rate and GDP.
In his press conference, Powell implied that the Fed felt that it had got to a kind of sweet spot, having done enough with three cuts this year to bolster the economy and defend against labor market weakness while leaving rates high enough to combat a nasty rise in inflation.
Wall Street was impressed and the indexes closed nicely higher, led by interest rate-sensitive small caps and the Russell 2000 Small Cap Index reached a new all-time record high. Shorter term interest rates pulled back a little but longer term rates continued to shift doggedly higher.
Despite the Fed decision, the global trend of lowering interest rates appears to be grinding to a halt. Central banks in Europe, Japan, Canada, Australia and New Zealand are all expected to keep their rates unchanged or even raise them in early 2026.
The healthy vibes were quickly dealt a blow after the close with Oracle’s report showing exploding expenditure and a bad miss on Q3 revenue estimates and the share price crapped out in the after-market. The punishment got worse when the real markets opened on Thursday, badly infecting other AI giant names (and massively-weighted index fund components) like Nvidia and Broadcom and throwing cold water on the initial performance of the large cap indexes which opened weaker despite encouraging weekly Jobless Claims figures.
But that only served to trigger the dip-buying cavalry who rode to the rescue of almost everything (except Oracle and Broadcom) to propel the S&P 500 to another new all-time high by the closing bell.
But Friday turned into a rout for Big Tech and especially highly-valued AI stocks as we saw clear signs of a profit-taking rotation away from this year’s big winners. Oracle and Broadcom continued to get brutalized and the pain spread to the likes of AI heavyweights such as Nvidia, CoreWeave and AMD. Inevitably this led to a hefty index plunge, especially the NASDAQ which closed out a rather dismal week getting particularly pounded.
Concerns are growing about “circular funding” in AI-world. Simply put, these firms are saying to each other: “if you buy my products, I’ll buy your stock (financed by issuing bond debt) so that you can buy more of my products”. You don’t need to be a financial whiz to see how this could all end in tears.
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ARTICLE OF THE WEEK ..
An impossible task. 500 companies. 11 sectors. Trillions of dollars in market value. An uncertain world. Yet every December hundreds of Wall Street analysts try to imagine where the S&P 500 will be at the end of next year and actually publish their guesses so that we can all mock them when they inevitably get it all wrong. Given their poor track record, it’s unclear why they bother.
.. AND I QUOTE ..
“The cover of Forbes magazine does not celebrate poor investors who made good decisions but happened to experience the unfortunate side of risk. But it almost certainly celebrates rich investors who made OK or even reckless decisions and happened to get lucky. Both flipped the same coin that happened to land on a different side.”
Morgan Housel, author and co-founder of the Collaborative Fund
LAST WEEK BY THE NUMBERS:
Last week’s market color courtesy of finviz.com
Last week’s best performing US sector: Materials (two biggest holdings: Linde, Newmont) ⬆︎ 2.4% for the week
Last week’s worst performing US sector: Technology (two biggest holdings: Nvidia, Apple) ⬇︎ 2.0% for the week
* SPY, a US Large Cap ETF, tracks the S&P 500 index, made up of 500 stocks from a universe of the largest US companies. Its price fell 0.6% last week, is up 16.3% so far this year and ended the week 1.2% below its all-time record closing high (12/11/2025).
* IWM, a US Small Cap ETF, tracks the Russell 2000 index, made up of the bottom two-thirds in terms of company size of a universe of 3,000 of the largest US stocks. Its price rose 1.2% last week, is up 14.9% so far this year and ended the week 1.7% below its all-time record closing high (12/10/2025).
* VXUS, a Global Non-US ETF, tracks the MSCI ACWI Ex-US index, made up of over 8,500 of the largest names from a universe of stocks issued by companies from around the world excluding the United States, in both developed and emerging markets. Its price rose 0.3% last week, is up 28.3% so far this year and ended the week 0.8% below its all-time record closing high (12/11/2025).
INTEREST RATES:
* FED FUNDS RATE * ⬇︎ 3.625% (0.25% down from a week ago)
* PRIME RATE ** ⬇︎ 6.75% (0.25% down from a week ago)
* 3 MONTH TREASURY ⬇︎ 3.63% (3.71% a week ago)
* 2 YEAR TREASURY ⬇︎ 3.52% (3.56% a week ago)
* 5 YEAR TREASURY ⬆︎ 3.75% (3.72% a week ago)
* 10 YEAR TREASURY *** ⬆︎ 4.19% (4.15% a week ago)
* 20 YEAR TREASURY ⬆︎ 4.82% (4.75% a week ago)
* 30 YEAR TREASURY ⬆︎ 4.85% (4.79% a week ago)
Data courtesy of the Federal Reserve and the Department of the Treasury as of the market close on Friday
* Decided upon by the Federal Reserve Open Market Committee at periodic meetings 8x a year. Used as a basis for overnight interbank loans and for determining high yield savings interest rates.
** Wall Street Journal Prime Rate as of Friday’s close. Tending to move in lockstep with the Fed Funds Rate, this measure is used as a basis for determining certain consumer loan interest rates such as credit cards, auto loans, personal loans, home equity loans/lines of credit and securities-based lending.
*** Used as a basis for determining mortgage interest rates and some business loans
AVERAGE 30-YEAR FIXED MORTGAGE RATE:
* ⬆︎ 6.22%
One week ago: 6.19%, one month ago: 6.23%, one year ago: 6.60%
Data courtesy of the Freddie Mac Primary Mortgage Market Survey
INTEREST RATE EXPECTATIONS:
Where will the Fed Funds interest rate be after the next rate-setting meeting on January 28th?
* Unchanged from now .. ⬆︎ 76% probability (65% a week ago)
* 0.25% lower than now .. ⬇︎ 24% probability (35% a week ago)
With eight rate-setting meetings in 2026, what is the most commonly-expected number of 0.25% Fed Funds interest rate cuts next year?
* ⬌ Two (down by one from a week ago)
Data courtesy of CME FedWatch Tool
All data based on the Fed Funds interest rate (currently 3.625%). Calculated from Federal Funds futures prices as of the market close on Friday.
PERCENT OF S&P 500 STOCKS ABOVE THEIR OWN 200-DAY MOVING AVERAGE:
* ⬆︎ 62%
One week ago: 60%, one month ago: 58%, one year ago: 65%
Data courtesy of MacroMicro as of Friday’s market close
This widely-used technical measure of market breadth is considered to be a very robust indicator of the overall health of the S&P 500 index.
A high percentage (above 70%) generally suggests broad market strength and a bullish trend, while a low percentage (below 30%) may indicate market weakness and a bearish trend.
FEAR & GREED INDEX:
“Be fearful when others are greedy and be greedy when others are fearful.” Warren Buffett.
Data courtesy of CNN Business as of Friday’s market close
The Fear & Greed Index from CNN Business can be used as an attempt to gauge whether or not stocks are fairly priced and to determine the mood of the market. It is a compilation of seven of the most important indicators that measure different aspects of stock market behavior. They are: market momentum, stock price strength, stock price breadth, put and call option ratio, junk bond demand, market volatility and safe haven demand.
Extreme Fear readings can lead to potential opportunities as investors may have driven prices “too low” from a possibly excessive risk-off negative sentiment.
Extreme Greed readings can be associated with possibly too-frothy prices and a sense of “FOMO” with investors chasing rallies in an excessively risk-on environment . This overcrowded positioning leaves the market potentially vulnerable to a sharp downward reversal at some point.
A “sweet spot” is considered to be in the lower-to-mid “Greed” zone.
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