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Wall Street saw a bloodbath after the Fed’s rate-cut shift view. The S&P 500 dropped 2.9%, whereas the Dow Jones Industrial Average fell 2.6%. Both saw the biggest one-day percentage decline since Aug. 5. Notably, the Dow Jones suffered its 10th straight session of declines — its longest streak of daily losses since October 1974. Meanwhile, the tech-heavy Nasdaq Composite Index slid more than 3.5% — its biggest daily decline since July 24 (read: Dow on a Record Losing Streak: Should You Buy its ETF?).
The small-cap Russell 2000, seen as the biggest beneficiary of rate cuts, dropped 4.4%, which was its biggest decline since June 16, 2022. Meanwhile, Real Estate Select Sector SPDR ETF XLRE, which also stands to benefit from further rate cuts, fell 2.7%.
Behind the Plunge
At its latest meeting, Fed chair Jerome Powell cut rates by 25 bps to 4.25-4.50% as expected but delivered a less dovish view for 2025. Powell envisions only two rate cuts in 2025, in contrast to four projections in September, given the solid labor market and the recent stall in lowering inflation.
The latest inflation data shows that consumer prices have been ‘somewhat elevated’ in the world's largest economy. Inflation in the United States increased the most in seven months in November . The Consumer Price Index grew at an annual rate of 2.7%, up from the 2.6% rise recorded in October and in line with economists' expectations. Higher costs for used cars, hotel rooms and groceries increased inflation. Excluding volatile food and energy costs, core prices rose 3.3% year over year, unchanged from October's increase. Core prices increased 0.3% on a month-to-month basis, the biggest rise since April (read: Inflation Edges Up in November: Bet on Quality ETFs).
Trump’s policies on restricting illegal immigration, enacting new tariffs, lowering taxes and reducing regulations will accelerate inflation, limiting the Federal Reserve's ability to cut rates.
The broad indices slump has led to smooth trading in a few corners of the ETF investing world. We have highlighted them below:
Volatility
The volatility level represented by the CBOE Volatility Index, also known as the fear gauge, jumped 74% to a four-month high of 27.62. This suggests that market worries have started to set in. This fear gauge tends to outperform when markets are declining, or fear levels about the future are high.
Both iPath Series B S&P 500 VIX Short-Term Futures ETN VXX and ProShares VIX Short-Term Futures ETF VIXY soared nearly 17%.