Market Volatility Expected Ahead of Trump's Return

Investors should "purchase a neck brace" in January, according to Yardeni Research, as they predict increased market volatility due to Donald Trump's potential return to office. This volatility, stemming from anticipated policy shifts under Trump 2.0, may create additional buying opportunities.

The stock market saw a downturn after the Federal Open Market Committee's (FOMC) Summary of Economic Projections (SEP) was released Wednesday, revealing a reduction in expectations for federal funds rate cuts in 2025—from four to two—compared to the previous SEP in September.

However, Friday marked a recovery in stock performance, bolstered by comments from two Federal Reserve officials indicating that the latest inflation report could support future rate reductions.

In a Friday interview with CNBC, Chicago Fed President Austan Goolsbee mentioned that significant reductions could occur over the next year to year and a half. He emphasized the importance of overall inflation reduction over the timing of any changes.

Likewise, New York Fed President John Williams expressed expectations for further interest rate cuts from the central bank during his CNBC appearance on Friday.

The market's rebound was aided by the House passing a budget bill, while the Senate worked late to secure enough votes for its passage.

Yardeni noted, "Did November's PCED inflation rate justify the ‘never mind’ reversal of the market's sentiment about the outlook for rate cuts in 2025? It might have."

November's Personal Consumption Expenditures Deflator (PCED) revealed a month-over-month annualized increase of just 1.5%, down from a year-over-year rate of 2.4%. The core PCED, which excludes food and energy, registered at 1.4% and 2.8%, respectively.

Federal Reserve Chair Jerome Powell commented on the October PCED figures during his post-FOMC press conference, stating that progress has been made in controlling inflation, but the policy must "remain restrictive to get that work done."

Currently, the supercore PCED, which the Fed aims to bring closer to 2.0%, stands at 3.5% year-over-year, although its month-over-month rate is at an annualized 1.9%.

Additionally, PCED measures for tenant and owner-occupied rent inflation remain elevated, at 4.4% and 4.9% year-over-year, but are expected to align more closely with lower current lease rent inflation metrics.

Lastly, the report pointed out concerns that the deflation of goods prices might be slowing, posing a potential short-term inflation risk.