Investor Panic as Dow Jones Drops 1,100 Points, S&P 500 Suffers Worst Fed Day Since 2001

Mixed Market Sentiment: Gains and Losses in a Volatile Session

The U.S. stock market experienced a substantial downturn on December 18, 2024. The Dow Jones Industrial Average plummeted by 1,100 points, marking its worst day since August and extending its losing streak to 11 days, the longest since 1974. The S&P 500 also suffered, posting its worst performance on a Federal Reserve policy day since 2001.

Federal Reserve’s Rate Cut and Market Reaction

The Federal Reserve’s decision to cut interest rates by 25 basis points was anticipated by the market. However, the Fed’s announcement that it would only cut rates twice in 2025, instead of the previously forecasted four cuts, caught investors off guard. Fed Chair Jerome Powell emphasized the need for progress on inflation, stating, “We need to see progress on inflation. That is how we are thinking about it. It is kind of a new thing. We moved quickly to get to here but moving forward we are moving slower”.

Impact on Major Indices

The Dow Jones fell 2.6%, closing at 42,326.87, while the S&P 500 shed 3%, falling below the 6,000 mark. The tech-heavy Nasdaq Composite also took a hit, dropping 3.6% to close well below the 20,000 mark. This significant decline in major indices reflects the market’s disappointment with the Fed’s cautious approach to future rate cuts.

Treasury Yields and Dollar Surge

The policy-sensitive two-year U.S. Treasury yield surged by 10 basis points to 4.35%, and the 10-year rate rose to levels last seen in May. Bloomberg’s gauge of the dollar jumped to its highest since November 2022. These movements indicate a shift in investor sentiment towards safer assets amid concerns about the Fed’s monetary policy.

Biggest Losers and Gainers

Among the biggest losers in the Dow Jones were Nvidia, which fell 2.25% to $134.25, and Disney, which dropped 1.36% to $113.34. On the S&P 500, Palo Alto Networks saw a significant decline, dropping 48.49% to $202.50, while Super Micro Computer fell 8.26% to $33.44.

On the other hand, some stocks managed to gain despite the overall market downturn. In the Dow Jones, Boeing rose 1.13% to $169.65, and Travelers increased by 0.99% to $246.30. In the S&P 500, Broadcom surged 24.43% to $224.80, and Lamb Weston Holdings gained 6.79% to $79.27.

Market Analysts’ Perspectives

Market analysts have expressed varied opinions on the Fed’s decision and its impact on the market. Max Gokhman, senior vice president at Franklin Templeton Investment Solutions, described Powell as “a hawk in dove’s clothing,” noting that despite downplaying the recent slowdown in disinflation, Powell hinted that tariffs wouldn’t be written off as transitory. Whitney Watson of Goldman Sachs Asset Management expects the Fed to skip a rate cut in January before resuming its easing path in March. Watson stated, “While the Fed opted to round out the year with a third consecutive cut, its New Year’s resolution appears to be for a more gradual pace of easing”.

Global Market Reactions

The Fed’s decision had a ripple effect on global markets. Mainline indices across the Asia Pacific region, including Japan’s Nikkei and Australia’s ASX200, fell in the range of 0.8% to 2%. In India, GIFT Nifty futures were trading nearly 350 points lower, signaling a shaky session for the Indian stock market. The Sensex and Nifty indices also awaited the Bank of Japan’s interest rate decision, adding to the market’s uncertainty.