The stock market experienced a notable pullback this week, with major indices such as the S&P 500, Dow Jones Industrial Average, and Nasdaq Composite recording declines. This downturn is attributed to several factors, including the Federal Reserve's recent policy decisions and rising Treasury yields.
On December 18, 2024, the Federal Reserve reduced its policy rate by 25 basis points to a target range of 4.25% to 4.5%. While this move was anticipated, the Fed's indication of a less aggressive approach to rate cuts in 2025 surprised investors, leading to increased market volatility.
In response to the Fed's announcement, the Dow Jones Industrial Average fell 2.6%, losing more than 1,100 points, while the S&P 500 and Nasdaq Composite slid 3% and 3.6%, respectively.
Additionally, rising Treasury yields have exerted pressure on equity valuations, contributing to the market's decline. The combination of these factors has led to a cautious sentiment among investors, with some analysts advising prudence before making new investments.
Despite the recent downturn, some market analysts remain optimistic about a potential year-end rally, commonly referred to as the "Santa Claus Rally." Historically, the last five trading days of December and the first two in January have yielded positive returns. However, given the current market conditions, investors are advised to monitor trends closely and exercise caution.
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