By John Stewart, chief investment officer at Farmers Trust Co.

Week in Review: Fed Plays The Grinch

Well, the Federal Reserve and its chairman, Jerome Powell, had an opportunity to play Santa Claus to the markets like they did last year, but instead they decided to flip the script and play The Grinch instead.

Earlier this week, the Fed cut its short-term interest rate target by a quarter of a percentage point as expected, but the commentary regarding future interest rate cuts was much more hawkish than the market expected.

Bottom line, the markets went from expecting a full percentage point of additional cuts in 2025 to only a half percent, and there was a lot of speculation that there may not be any more cuts at all next year.

That was good enough to send the S&P 500 index down nearly 3% in the course of about 2 hours time.

This continues to be a market that seemingly lives and dies on easy monetary policy – falling 20% in 2022 when interest rates were rising, and rising smartly over the past 14 months after the Fed changed course and began signaling lower rates.

There is a lot of change in the air, and investors have assumed for a while now that markets were impervious to potential risks. Perhaps some caution is warranted until there’s more evidence that corporate earnings for 2025 are on track.

Featured Insight: Stay Disciplined

This week’s market action is a good lesson in why investors should be careful not to get swept up in the emotion of market momentum – and that’s true on the upside as well as the downside.

A lot of investors have felt pressure to get more aggressive in their portfolios as markets moved higher in recent months, thinking that the market had nowhere to go but up in the future.

Similarly, many investors shunned stocks at the end of 2022 after markets fell 20% over the course of 12 months.

Rather than getting tricked into buying high and selling low, it makes sense to pick an asset allocation that meets your needs and risk tolerance and then stick with it.

This results in rebalancing your portfolio periodically by selling down equity exposure after big rallies and adding to exposure after declines – buying low and selling high.  Sounds simple, and it is, but it’s never easy in practice because it requires you to do the opposite of what your emotions are telling you.

Looking Ahead: Year End Volatility Likely

There have been some interesting dynamics at play as investors prepare for the coming year.

Winning stocks have been moving even higher (until this past Wednesday anyway) as investors don’t want to sell winners and realize capital gains before year end.  Meanwhile, losing stocks have fallen even further with investors selling those positions for tax losses.

This will likely flip as soon as the calendar does, with winners coming under pressure and former losers rallying.  This has happened each of the past few years.

It’s entirely possible that the markets will anticipate this and front-run would be sellers on some of the biggest winning positions – that’s you Big Tech.

Don’t be surprised if the biggest winning stocks of the past couple of years see more downside BEFORE the end of the year.