Last week’s blog post highlighted the phenomenal market performance of the S&P 500 over the last two years. Many of the statistics quoted implied that the market is currently considered “rich” and could be ripe for a pullback. In that blog post I posited that a potential trigger could be “turmoil in the bond market”. Surprise, surprise - that is what we saw after the Fed meetings and announcement on Wednesday!
The Fed cut the Fed Funds rate by 0.25% and Chairman Powell indicated that there was a chance for “only” two rate cuts next year instead of the market expectation for four. This prompted the market to worry about a pickup in inflation, driving long term rates up 0.37% from 4.18% on December 2 to 4.55% today.
The markets reacted with a significant pullback. Small cap stocks (SCHA), making a strong push so far during Q4, were down 4.2% in one day while the S&P 500 (IVV) lost 2.9%. The increase in interest rates caused core bonds (AGG) to lose 0.8% and short bonds, having less interest rate risk, only lost 0.3%.
So, what does this mean for you? While the market’s reaction may seem abrupt, this level of volatility is normal in investing. At D&A, our disciplined approach to rebalancing ensures your portfolio remains aligned with your goals despite short-term market movements. If you have questions about how these developments affect your investments, feel free to reach out—we're here to help.