December 19th Market Overview

Happy Thursday everyone.

End of the year before a new presidency is usually very volatile.

Yesterday we had some serious sell volume come in off the Fed's more hawkish outlook for 2025. The market has been expecting more cuts all year and the reality is the Fed has to go slow in order to curb inflation. While these big liquidity events can signal short-term tops, especially with yesterday's historic VIX spike (second-largest ever), today's price action gives reason to stay measured yet cautious in my outlook.

Here's why: Today being flat across major indices tells me institutional money isn't rushing to the exits after the Fed news just yet, I always like to watch end of day selling pressure.

Big money rotating to defensive positioning typically needs several days of heavy selling volume, not just isolated events. And with the VIX retreating 17.49% today, we're seeing panic sentiment cool off.

Today suggests that yesterday's sharp sell-off might have been more about markets recalibrating to the Fed's new rate cut timeline (two cuts vs four) rather than the start of a major correction. We've had an incredible year in the markets, and some volatility is expected as we digest the Fed's more patient approach to 2025.

Sorry for the rant 🙂 

Let's dig in...

Executive Summary

• Fed cuts rates by 25bps to 4.25-4.5% range but signals only two cuts for 2025, down from four projected in September
  

• VIX recorded its second-largest single-day spike in history yesterday, surging 74% before cooling 17.49% today
  

• Q3 GDP growth exceeded expectations at 3.1%, while jobless claims dropped more than anticipated to 220,000
  

• $MU shares down on weak guidance despite data center revenue growing 400% YoY

Market Overview

Key Market Drivers

1. Fed’s hawkish pivot with reduced rate cut projections for 2025
   

2. Stronger-than-expected economic data supporting market resilience
   

3. Significant volatility adjustment following Wednesday’s VIX spike
   

4. Growing concerns over potential government shutdown with odds rising to 54%

Stock Spotlight

• $MU: ▼ 16% after issuing weak Q2 guidance despite Q1 earnings beat. Data center revenue surpassed 50% of total revenue for the first time, growing 400% YoY. Analysts at Bernstein and JPMorgan argue the sell-off is overdone.
  

• $DARDEN: ▲ 15% following strong same-store sales growth at Olive Garden and LongHorn Steakhouse, marking its best trading day since 2020.
  

• $HIMS: ▼ 10% after FDA announced tirzepatide shortage resolution, potentially impacting the company’s GLP-1 business.

Big Name Updates

• $MSFT: UBS raises price target to $525, maintaining buy rating on strong AI positioning
  

• $TSLA: European registrations fell 15.2% YTD; entering discussions with Austin authorities for robotaxi deployment
  

• $AAPL: Negotiating with Tencent and Bytedance to integrate their AI models into Chinese iPhones, addressing local regulatory requirements

Other Notable Company News

• $OKTA: KeyBanc initiates overweight rating, PT $115, citing widening lead in security priorities
  

• $RTX: Upgraded to outperform, PT raised to $140 on defense/commercial diversification benefits
  

• $TPR: Jefferies upgrades to buy, PT $80, following CPRI deal completion
  

• $VRTX: Phase 2 trial results disappoint as suzetrigine shows similar efficacy to placebo

Sector Watch

Bond Market

The 10-year Treasury yield up to 4.566%, extending gains following the Fed’s policy announcement and strong economic data.

Rising yields reflect shifting market expectations for the pace of rate cuts in 2025.

Policy Watch

The Federal Reserve delivered a hawkish message by trimming its 2025 rate cut forecast while raising PCE inflation projections to 2.5% from 2.1%. The inclusion of “extent and timing of additional adjustments” language suggests a cautious approach to future policy changes.

BREAKING: House Republicans have just announced reaching a short-term government funding agreement to prevent the shutdown that was set to begin Friday night. House Appropriations Committee Chair Rep. Tom Cole confirmed a deal has been reached and expects a vote, though specific details remain undisclosed.

What to Watch

1. Government Funding Vote:

• Monitor the voting process for the newly announced funding deal

• Watch for potential market reaction to shutdown resolution

2. Fed Officials’ Commentary:

• Watch for additional context on reduced rate cut projections

• Particular focus on inflation expectations and economic growth outlook

3. Consumer Spending Data:

• Key indicator for holiday retail performance

• Impact on retailer stocks and broader market sentiment

4. Micron’s Industry Impact:

• Watch for ripple effects across semiconductor sector

• Monitor data center demand trends and inventory corrections

Thanks for reading 🙂

- John