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Prepare for market whiplash in January, Yardeni says

Published 12/23/2024, 03:57 AM
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Investing.com -- Investors should “purchase a neck brace” in January, Yardeni Research said, predicting more market volatility as Donald Trump prepares to retake office. This volatility, driven by potential policy changes under Trump 2.0, could present more buying opportunities.

The stock market experienced a downturn following the release of the Federal Open Market Committee's (FOMC) Summary of Economic Projections (SEP) on Wednesday, which indicated a scaling back of expectations for federal funds rate cuts in 2025 from four to two, compared to the projections in September's SEP.

However, Friday saw a rebound in stock performance after two Federal Reserve officials suggested that the latest inflation report could support rate reductions in the future.

Chicago Fed President Austan Goolsbee, in a Friday interview with CNBC, said that over the next year to a year and a half, there is potential for significant to “go down a fair amount,” emphasizing that the timing of such changes is less important than the overall reduction in inflation.

Similarly, New York Fed President John Williams, also speaking to CNBC on Friday, anticipated further interest rate cuts by the central bank.

The market's recovery was also bolstered by the news that the House passed a budget bill and the Senate was working late to secure enough votes for its passage.

“Did November's PCED inflation rate justify the "never mind" reversal of the market's sentiment about the outlook for rate cuts in 2025? It might have,” Yardeni noted.

The headline November Personal Consumption Expenditures Deflator (PCED) saw a month-over-month annualized increase of only 1.5%, a decrease from the year-over-year rate of 2.4%.

The core PCED, which excludes food and energy, was at 1.4% and 2.8% respectively.

Federal Reserve Chair Jerome Powell commented on the October PCED readings during his post-FOMC press conference on Thursday, noting that while progress has been made in controlling inflation, the policy must “remain restrictive to get that work done.”

Meanwhile, the supercore PCED, which the Fed aims to bring closer to 2.0%, currently stands at 3.5% year-over-year, although its month-over-month rate was at an annualized 1.9%.

Furthermore, the PCED measures for tenant and owner-occupied rent inflation remain high, at 4.4% and 4.9% year-over-year, but are expected to align more closely with lower current lease rent inflation measures.

The report also highlighted concerns that the deflation of goods prices might be decelerating, posing a short-term inflation risk.

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