This year's Santa Rally had turned into a Santa Slump with the US Federal Reserve all be guaranteeing a weak finish for the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) this year.
The Fed was the last chance ASX investors had for a market rebound this month and its chair Jerome Powell brought coal to the party by not only lifting rates but by telling investors to expect two more rate hikes in 2019.
The market is only pricing in one hike and investors were hoping that Powell would take a more dovish tone by either holding back on the widely expected 25 basis point hike to bring the benchmark rate to between 2.25% and 2.5% last night, or to agree with 2019 rate expectations of the market.
Santa Rally to Christmas Crash
That isn't the only thing that's put off investors. The Fed continues to shrink its balance sheet at the same time as it's hiking rates. This means less money in the financial system as the cost to borrow increases.
It's like tapping the brakes twice!
There is a bit of a disconnect between how the Fed and the markets see the US economy. The US central bankers said in a statement after the rate decision that they were still bullish on the outlook as economic activity has been increasing at a "strong rate".
The Fed added that gradual increases to the interest rate was consistent with "with sustained expansion of economic activity, strong labour market conditions, and inflation near the committee's symmetric 2% objective over the medium term".
Powell may be trying to get the rate as high as he can while US economic data justifies the move as that will give the Fed more room to cut rates if the US economy sputters in 2019 as equity markets seems to be suggesting.
More pain ahead
While Powell did sound more dovish (the Fed was initially expected to life rates three times in 2019), this wasn't enough to bring bargain hunters back into the fold with the S&P 500 crashing 1.5% yesterday.
The ASX 200 is tipped to follow the US market lower when it opens this morning and it's probably the high price-earnings (P/E) growth stocks that will take the brunt of the sell-off.
This means shareholders in tech darlings like WiseTech Global Ltd (ASX: WTC) share price, Altium Limited (ASX: ALU) share price and Xero Limited (ASX: XRO) share price could be in for a wild ride.
On the flipside, oil stocks could find some much needed reprieve after yesterday's big sell-off in the Woodside Petroleum Limited (ASX: WPL) share price, Santos Ltd (STO) share price and Oil Search Limited (ASX: OSH) share price as crude oil prices staged a tentative recovery overnight.
While we might be winding down for the festive season, the market will be keeping us on our toes!
