[Economic Analysis] December FOMC Rate Cut Outlook and Market Strategy | Will the Santa Rally Come?

[Economic Analysis] December FOMC and the Santa Rally

Every December, the stock market often sees a seasonal upward trend known as the 'Santa Rally.' However, this year, Santa's gift bag seems to depend on the U.S. Federal Reserve (Fed). This is because of the December Federal Open Market Committee (FOMC) meeting, which is just around the corner. Will the base interest rate go down? In this post, instead of using complex economic jargon, I will clearly summarize the key points investors need to focus on and account management strategies for each scenario.

December FOMC Rate Cut Outlook and Stock Market Response Strategy

1. December FOMC: Why Is It So Important?

This December FOMC holds symbolic significance as it is the final interest rate decision meeting of 2025. It is a watershed moment that determines market liquidity at year-end and an important occasion to gauge the direction of monetary policy for next year.

Currently, the market's attention is focused on 'whether they will cut rates or freeze them.' According to the CME FedWatch Tool, market participants are engaged in a fierce battle of wits between a rate cut and a freeze. If a result differs from market expectations, volatility could expand rapidly at a time when year-end trading volume has decreased.

---

2. Key Variable: What is a 'Hawkish Cut'?

Simply cutting rates does not necessarily mean the market will cheer. The scenario we must be most wary of is a 'Hawkish Cut.'

• Hawkish Cut: This refers to a case where the base rate is lowered by 0.25%p, but a tightening message is delivered through the Dot Plot or Chairman Powell's press conference, such as saying "additional cuts will be cautious" or "inflationary pressure remains."

In this case, the market may react more sensitively to the negative factor of 'future uncertainty' than the positive factor of a 'rate cut.' In other words, you must recognize that even though interest rates have gone down, stock prices could actually fall or move sideways.

---

3. How to Handle My Stocks by Scenario

The market's complexion will change completely depending on the meeting results. You need to prepare two scenarios in the realm of response rather than prediction.

1) Rate Cut Executed (Including Dovish Message)

This is the scenario the market anticipates the most. Due to expectations of liquidity supply, Growth Stocks and the tech-heavy Nasdaq market are highly likely to show strength.

• Response Strategy: Maintain exposure to risk assets such as tech stocks and Bitcoin, or utilize it as a short-term trading opportunity.

2) Rate Freeze or Strong Hawkish Cut

Expectations for a Santa Rally could turn into disappointment, leading to a sell-off. In particular, high-PER stocks with high valuation burdens may undergo significant corrections.

• Response Strategy: Increase cash holdings or defensively rebalance your portfolio into low-volatility Dividend Stocks and defensive stocks such as consumer staples.

---

4. Conclusion: 'Response' Is Always More Important Than Prediction

It is impossible to predict the future 100% accurately in financial markets. Until the December FOMC results are out, rather than hasty chase buying, a 'response' focused on risk management is needed.

If you secure a certain level of Cash, you can use it as an opportunity for bargain hunting when the market crashes, or for profit-taking when it surges. I recommend checking your portfolio in advance so that it can fully receive Santa's gift this year-end.

The content of this blog is for reference only for investment judgment, and investment decisions must be made under the individual's own judgment and responsibility. Under no circumstances can the information in this blog be used as evidence of legal responsibility for investment results.