Stock bulls were left without action as the Fed was “blind” on interest rates

(Bloomberg) — Bulls stormed the stock market early in trading Thursday, snapping up stocks that suddenly went on sale less than 24 hours after the Federal Reserve’s hawkish policy shift triggered a historic plunge.

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But the longer Thursday’s session lasts and stock indexes shrink or lose their initial gains altogether, the more questions arise about whether it’s just a decline – and whether investors should even join in.

The stock market is in a perilous position after a two-year run that is virtually unparalleled in recent history. Signs of euphoria are omnipresent: positioning is stretched and demand for loss protection is muted. Fund managers have reduced their cash holdings to record lows and invested heavily in US stocks. And the S&P 500 was 10% above its 200-day moving average.

“I would be cautious,” said Eric Beiley, executive managing director of wealth management at Steward Partners. “Volatility is elevated and another sell-off could be imminent.”

All of these things are considered signals that a downturn is likely. And Fed Chair Jerome Powell’s discussion of what he sees, coupled with the central bank’s intention to move slower than expected in expected interest rate cuts, may be the most worrying aspect for stock investors. “It’s no different than driving on a foggy night,” Powell said at his news conference on Wednesday, describing the interest rate outlook and urging caution in lifting restrictive policies.

“Be careful what you wish for,” said Adam Phillips, managing director of portfolio strategy at EP Wealth Advisors. “Most expected and supported a more restrictive cut, and that’s exactly what we got.”

Traders now face the unique challenge of betting on how stocks will move from here. History is no longer a guide. The previous macroeconomic setup – a strong economy with the prospect of the Fed easing monetary policy – ​​has been reversed. When you factor in the impact of Donald Trump’s plans for tariffs and mass deportations of undocumented workers, as well as tax cuts and a regulatory overhaul, the economic outlook is even more confusing.

“After focusing primarily on the positives following the November election results, investors realized that political uncertainty could lead to a bumpy road ahead in the near term,” Phillips said.

The turmoil that sent the Cboe Volatility Index (VIX) to its highest level since August comes at a typically optimistic time for the stock market. Typically, the second half of December benefits from asset managers finding bargains as retail investors head into the holidays.

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