The Federal Reserve's "hawkish" interest rate cuts scare Wall Street, and the stock market bulls refuse to buy on dips

The Zhitong Finance APP noted that after the U.S. stock market opened on Thursday, bulls rushed into the market, buying up stocks that had been suddenly sold off less than 24 hours after a historic drop triggered by the Federal Reserve's hawkish stance.

However, as Thursday's trading progressed, the stock indices retraced their initial gains and even completely reversed, raising the question of whether this was just a dip—and whether investors should buy in.

After nearly two years of an almost unparalleled bull market, the stock market finds itself in a precarious position. Signs of thriving are everywhere: tight positions and low demand for loss protection. Fund managers have reduced cash holdings to historic lows and heavily invested in U.S. stocks. The S&P 500 index is 10% above its 200-day moving average.

Eric Beiley, Executive Managing Director of Steward Partners Wealth Management, stated, "I would be cautious," adding, "Volatility is high, and another sell-off may occur."

All of this is seen as a signal that the economy may be slowing down. Federal Reserve Chairman Jerome Powell discussed what he sees, and the possibility that the Fed's rate cuts may be slower than expected, which could be the most unsettling aspect for stock market investors. "It's like driving on a foggy night," Powell described the interest rate outlook at a press conference on Wednesday, urging caution in unwinding restrictive policies.

Adam Phillips, Managing Director of Portfolio Strategy at EP Wealth Advisors, said, "Be careful of your wishes. Most people expect and support aggressive rate cuts, and that's exactly what we are getting."

Traders now face a unique challenge of betting on the direction of the stock market. History is no longer a guide. The previous macro environment—strong economy, with the Fed expected to ease monetary policy—has been upended. Coupled with Trump's tariff plans and large-scale deportation of undocumented workers, as well as the impacts of tax cuts and regulatory reforms, the economic outlook has become even more chaotic.

Phillips stated, "After focusing on the positive factors following the November election results, investors have accepted the reality that policy uncertainty may bring bumps to the economy in the short term."

This volatility has caused the Chicago Board Options Exchange Volatility Index (VIX) to rise to its highest level since August, a time when the stock market is typically in an optimistic phase. Usually, in the second half of December, retail investors go on vacation, and fund managers take the opportunity to buy cheap stocks, benefiting the stock market This year's trend is somewhat different. So far, the S&P 500 index has fallen 2.4% in December, on track for its worst quarterly performance in over a year. The S&P 500 index has seen returns exceeding 20% for two consecutive years, and while bulls have performed exceptionally well, they face the question of whether to lock in these profits before the new government's plans and their impact on monetary policy become clearer.

Beiley from Steward Partners stated, "I have been building short-term cash positions using money market funds and U.S. Treasury bonds to hedge against the scenario where the Federal Reserve does not cut rates as significantly as previously expected—this is a good move."

However, global fund managers have taken the opposite approach, reducing cash holdings and pouring substantial amounts into the U.S. stock market. In the process, they triggered a key indicator that reached a threshold identified by Bank of America, which has historically been a sell signal for stocks.

For investors wanting to know what might happen next, this warning may be worth a second look.

Carol Schleif, Chief Market Strategist at BMO Private Wealth, said, "As we approach the end of the year, many people have realized gains. Taking some profits off the table may not be a bad idea."