The Fed Cut Rates. Markets Still Slipped

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Around the Market

Late year rotation and fading momentum test the Santa Rally narrative

The Fed came and went last week, delivering the rate cut the equity market was looking for, but the S&P 500 (via SPY) still closed 0.42% lower on the week at $680.73.

Equities showed notable divergence. The S&P 500 and Nasdaq pushed toward their respective October all time highs but failed to sustain momentum, driven in part by post earnings selloffs in Oracle (ORCL) and Broadcom (AVGO). In contrast, small caps showed relative strength, with the Russell 2000 breaking out to a fresh high.

In theory, a lower fed funds rate should benefit smaller companies more over time due to reduced borrowing costs. That may help explain the recent rotation into small caps. However, Friday and Monday marked a sharp reversal, with each session closing below the prior day’s low, signaling fading short term momentum.

GDP remains resilient, but growing concerns around the labor market pushed the FOMC to approve a rate cut despite inflation remaining elevated. Following today’s Non Farm Payrolls report, only a handful of meaningful macro events remain on the calendar that could materially move markets.

With just 10 trading days left after today, trade desks and portfolio managers will begin winding down activity. A key question is whether they focus on protecting gains as 2025 comes to a close or attempt one final push toward a year end all time high. The Santa Claus Rally is a well documented seasonal pattern with historical backing, but every year is different. Given how much of an outlier this year has been, it would not be surprising if volatility spoils the holiday cheer.

Other key market moves this past week:

The Week Ahead

Economic Calendar

• Consumer Price Index CPI (Thu 12/18 8:30a ET)

• US Durable Goods Orders (Tue 12/23 8:30a ET)

Notable Earnings

• Micron Technology MU (Wed 12/17 after close)

• FedEx Corp FDX (Thu 12/18 after close)

• Nike Inc NKE (Thu 12/18 after close)

Not an exhaustive list — just a few I’m watching closely for potential market impact.

On My Radar

Why the 10 year Treasury may matter more than the headline cut

There is a common misconception around the phrase “the Fed is lowering rates.” What the Federal Reserve is specifically adjusting is the target range for the interest rate banks charge each other for overnight loans to meet reserve requirements. The market determined weighted average of these loans is known as the effective federal funds rate. They’re not adjusting mortgages, car loans, or credit card interest rates.

This distinction is why my attention remains on the bond market, specifically the 10 year Treasury Note (/ZN).

A lower fed funds rate does not guarantee that longer dated yields will fall immediately. In fact, 10 Year Yield Futures (/10Y) closed slightly higher yesterday than they did on the day the FOMC minutes were released. That divergence is precisely why the 10 year T Note continues to stand out.

Bond prices move inversely to yields. When bond prices rise, yields fall, and vice versa. Traders positioning for lower yields often express that view by going long bonds. Bond volatility remains relatively low but has started to edge higher. With IV rank below 5, that environment tends to favor option buying strategies over premium selling.

For traders looking for a smaller and more accessible instrument, IEF, the iShares 7 to 10 Year Treasury Bond ETF, offers another way to gain exposure to this part of the curve.

What’s Top of Mind

Why handling variance matters more than avoiding it

Last week, I was catching up on one of the podcasts I enjoy when one of the bettors said something that stuck with me. I’m paraphrasing, but the idea was simple: the ability to overcome negative variance is one of the best indicators of long term success.

That concept extends far beyond sports betting. You see it in investing, relationships, careers, health, and any area where outcomes compound over time. There will always be good stretches and bad stretches. Wins cluster, losses cluster, and randomness tends to show up at the worst possible moments.

Variance is simply the natural gap between effort and outcome. You can make sound decisions and still get poor results in the short term. You can also make questionable decisions and get lucky. The challenge is that our brains tend to overweight recent outcomes, even when those outcomes might say very little about the quality of the underlying process.

This is where many people get tripped up. A short losing streak feels personal. It creates doubt. It tempts you to change strategies prematurely, abandon what was working, or overcorrect in an attempt to make things back quickly. In markets, that can look like chasing trades. In relationships, it can look like overanalyzing a rough patch. In fitness or career goals, it often leads to quitting when progress feels slow.

If you genuinely believe your approach is grounded in logic, data, or experience, the best response to short term negative variance is often to stay the course. Consistency matters more than perfection. Most meaningful outcomes come from steady inputs applied over long periods of time, not constant course correction.

At the same time, staying the course doesn’t mean being inflexible. If enough time has passed and results consistently miss expectations, that is a signal worth examining. Review becomes productive when you focus on what you are doing, not just what is happening. Are the assumptions still valid? Are there small adjustments that improve execution without abandoning the core process? Are there small details that may have been overlooked?

Short term fluctuations are unavoidable in every worthwhile pursuit. Success tends to favor those who can absorb the rough stretches without panic, learn without overreacting, and keep showing up long enough for the odds to work in their favor. And yes, a little expected value and risk math might help, too.

P.S. Want to see more of my trades? Subscribe to my YouTube channel.

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Hitting the Bid content is for informational and entertainment purposes only. The information contained is not, nor is it intended to be, trading or investment advice or a recommendation of any security, futures contract, digital asset or alike. I may hold a position in the trading vehicles discussed. Trading and investing contains risk. All investors should evaluate their own risk tolerance, financial situation, and investment duration before entering any trade or investment.