When the Chairman of the Federal Reserve (the Fed) – who, by common understanding, is believed to know just about everything there is to know about the world’s economy – uses a phrase like “It’s like walking around in a darkened room...” on live TV, markets are bound to notice. And it wasn’t the only vivid metaphor he used last week during the press conference following the Fed’s latest quarter-point cut to interest rates: In nearly the same breath, Chairman Jerome Powell also invoked the image of driving around on a foggy night as he described the challenges associated with guiding policy in an uncertain economy.¹

It’s not like Powell was telling us anything we didn’t already know – steering monetary policy for the world’s biggest economy is always a little bit like wandering around in the living room with the lights off. He used both of these phrases in response to a question asking whether he and his committee were adjusting their thinking to account for the presumed inflationary impacts of incoming President Donald Trump’s expected fiscal and trade policies. Switching back to Powell’s second image, that’s like driving a car, on a foggy night, over a bridge, in heavy traffic, when the streetlights are all burned out, too.

But markets apparently hate to be reminded about such things, because Wednesday’s post-Fed performance was among the worst for U.S. equity markets so far this year: When the fog finally lifted, the S&P 500 Index had dropped 2.95% and the Nasdaq Composite had lost 3.6%. Small-caps, which at one point had collapsed by nearly 5.5%, finished the day 4.4% lower – also among this year’s worst performances. U.S. Treasury yields surged, too, as market expectations about the Fed’s plans for the coming year were recalibrated.

And it wasn’t all about the Fed, either: Markets received an unpleasant reminder or two from the strictly political realm. The first came by way of Brazil, when investors suddenly revolted against an unsustainable fiscal agenda presented by that country’s president by sending the Brazilian real sharply lower. Central bankers quickly implemented “extraordinary measures” designed to rescue the currency – at least temporarily – and there seemed to be little spill over into markets north of the equator. But any time the word “panic” appears in the financial media (as it did to describe a sudden sell-off in Brazil’s bond market), oldsters like me are reminded of currency crises gone by, when the contagion was real and long-lasting.

Next up was an unforced error in the U.S. Fiscal policy was center stage in this one, too, as congressional leaders briefly looked as if they might allow the continuing resolution that has kept the government running for months to expire without replacing it, thereby forcing a government shutdown over the holidays. That seemed to keep markets from fully rebounding after Wednesday’s Fed-inspired losses, but in the end a deal was done and a mini relief rally ensued on Friday afternoon. Again, though, the Washington fracas served as reminder that any assumptions about the smooth functioning of government necessary to support the economy might ultimately prove false.

Meanwhile, the economy itself continued to bump around, at least partially in the dark as well. The list of ‘good news’ developments included word that the Conference Board’s Index of Leading Economic Indicators had turned higher for the first time in two years, pushed up by a flattening out of labor market declines and an unexpected upturn in housing starts.² The consumer continues to spend, too, with retail sales advancing a better-than-expected 0.7% last month, driven by higher auto sales and a surge in online spending.³

Services activity also remained robust, a point hammered home by continued strength in Wednesday’s ‘flash’ purchasing managers’ indices from S&P Global.⁴ Less upbeat was manufacturing, which remained in contraction mode when viewed through the lens of the same PMI release as well as weak industrial production numbers,⁵ a flat Empire State Manufacturing Index,⁶ and a very weak Philly Fed.⁷

So for now, it’s more of the same: a growing (but lopsided) economy where services activity continues to carry the burden, consumers (at least high-end consumers) continuing to spend unabated and an advancing (but even more lopsided) U.S. equity market dominated – as it is – by a very small number of very large stocks – joined this week by AI’s latest “Me Too,” Broadcom. And I suppose that’s enough to be pleased about, particularly as we head into the holiday season. 

But the skeptic in me still can’t shake the stumbling-around-in-the-dark image given to us by Powell himself, and that makes me wonder if we’re about to stub our metaphorical toes on an equally metaphorical coffee table. That gives the depth of Wednesday’s market sell-off particular relevance: After all, there wasn’t much inside the Fed’s decision or in the post-meeting press conference that should’ve been all that shocking to anyone. And yet investors greeted that mostly benign/mostly consensus event by handing markets one of their biggest declines this year and slathering on a big spike in both yields and overall equity market volatility to boot. 

That makes me wonder if equity markets in particular had finally grown tired of being called “expensive” and were simply looking for an excuse to blow off a little steam. And that makes me wonder if there might be another coffee table lurking somewhere in the dark for us to all bang our knees on.

If it happens, that could ultimately be a good thing: Markets need to broaden out from a single-minded focus on the largest of the large AI plays, and that necessarily means a period of painful adjustment. Maybe that’s exactly what last week was. But even if it wasn’t, at least we can all pause for a moment, catch our breath, and get ready for whatever 2025 has in mind for us.

What to watch this week

The Christmas holiday will blow a hole in the middle of this week’s economic calendar with much the same effect as John McClane’s violent redesign of Nakatomi Plaza back in 1988 (if you know, you know...). There is very little expected beyond Monday’s front-loaded schedule of releases, but Monday is pretty packed: We’ll get new data on the overall direction of the U.S. economy by way of the Chicago Fed’s National Activity Index (or CFNAI), a final look at December consumer confidence from the Conference Board, durable goods orders and new home sales.

Of these releases, the CFNAI could be the most interesting. As mentioned above, last week’s Leading Economic Indicators index (LEI) turned sharply higher, the first time that index has clearly suggested future growth for the U.S. economy in about two years (suggesting — as Chairman Powell did during Wednesday’s press conference — that the recession-or-soft-landing debate has finally been settled on the side of “soft landing”). But there are reasons to be skeptical about the durability of that call, not the least of which is that the LEI’s strength relied on a surge in housing starts that was in turn at least partially driven by the very volatile (and heretofore very depressed) multi-family segment. If that tips over (and if the labor market starts softening again as the new year gets underway,) the LEI could juke back the other way. Because the CFNAI seeks to essentially do the same thing (namely, predict the future direction of the U.S. economy), but in a more detailed and comprehensive way, it will be a crucial cross-check of the LEI’s upbeat tone.

Second on the list is probably the Conference Board’s read of consumer confidence, also due Monday. Readers might recall that the University of Michigan’s mid-December read of consumer sentiment also rose higher, not unlike last week’s LEI. But skepticism is warranted there, too, because the UofM interpretation of its own data was cautiously skewed, suggesting that sentiment might have been elevated by ‘panic buying’ of durable goods ahead of expected price increases. That makes Monday’s consumer confidence report an important way to check UofM’s skepticism in spite of the surge in its own data. 

In third place, the Census Bureau will release its estimate of new home sales. Last week’s homebuilder sentiment release from the National Association of Home Builders was somewhat mixed, but sales expectations surged to their highest level since April 2022.⁸ (For reference, that’s when mortgage rates were still hovering around 5% and the Fed was still operating under the “inflation is transitory” delusion.) If sales activity is indeed picking up, that’s undoubtedly good news for the economy. But it’s notable that builders still report a heavy reliance on incentives and discounts, which again argues for a cautious interpretation of unambiguously positive data that Monday’s new home sales data could provide.

Finally, Friday’s release of inventories at the retail and wholesale level might be worth a glance. Friday’s data will reflect November levels but could set an important baseline for future data – beginning with December’s release, it might be possible to see how businesses are reacting to the potential threat of a trade war in 2025.

In closing, I hope you are able to slow down, take a deep breath, and spend time with family and friends during this holiday season. Wishing you and yours a happy holiday!