Stock market panic is subsiding, but is it time to start buying again?

Emily Cresswell | 5 min read | Jan 23, 2025

After a period of volatility and concern, the stock market is showing signs of stabilization. While the recent dip had many investors on edge, the three major catalysts driving the decline are starting to reverse. This shift begs the question: is it time to start buying again? Let’s dive into the factors at play.

3 major catalysts driving the market dip are reversing

1. The yield on the 10-year treasury is reversing

Just weeks ago, the yield on the 10-year Treasury bond was approaching 5%, a level not seen in decades. This spike was largely driven by concerns over persistent inflation and the Federal Reserve’s hawkish stance on interest rates. Higher bond yields make fixed-income securities more attractive than stocks, often resulting in capital shifting out of equities.

Now, we’re seeing those yields pull back, thanks to inflation numbers that came in cooler than expected. Lower-than-anticipated Consumer Price Index (CPI) data suggests that inflation may be easing, giving investors hope that the Federal Reserve could pause its rate hikes sooner rather than later. A cooling inflation environment not only reduces pressure on the Fed but also makes the stock market a more appealing place to invest again.

2. The U.S. Dollar is weakening

The U.S. dollar’s strength has been a significant headwind for multinational corporations and emerging markets. A strong dollar increases the cost of U.S. goods abroad, dampens corporate earnings, and adds pressure to global economies that rely on dollar-denominated debt.

Interestingly, we’ve been here before. The dollar weakened in 2017 after Trump took office, largely because his stance on tariffs and trade came in softer than expected. The market appears to be pricing in a similar scenario now, as softer rhetoric on trade and tariffs begins to emerge. A weaker dollar could provide relief for export-heavy industries and global markets, making stocks more attractive in these sectors.

3. Oil prices are cooling

Energy costs have a direct impact on inflation and consumer spending, so oil prices are always a key indicator to watch. Recently, oil attempted to break above $80 per barrel but faced strong resistance, retreating back into the mid-$70s range.

This pullback in oil prices is significant for two reasons:

1. Lower energy costs reduce inflationary pressures, giving the Federal Reserve more room to ease monetary policy.
2. It alleviates pressure on consumers and businesses, supporting broader economic activity.

The stabilization of oil prices at more reasonable levels could act as a green light for investors to start buying into the market dip. Historically, declining energy prices have been a catalyst for renewed confidence in equities.

What’s next? Key events to watch

While these reversals are promising, there are still key events on the horizon that could impact market direction:

1. The federal reserve’s decision

The Fed’s upcoming meeting at the end of the month remains a critical moment. While there’s speculation that the central bank may pause its rate hikes due to cooler inflation data, this isn’t guaranteed. If the Fed signals continued rate hikes, we could see renewed market volatility. Conversely, a dovish tone could further solidify the market’s recovery.

2. GDP numbers

The GDP report, also expected at the end of the month, will provide a clearer picture of the U.S. economy’s health. A strong GDP reading could reinforce confidence in the market, while weaker-than-expected numbers might reignite fears of a slowdown. Investors should pay close attention to how the market reacts to these numbers, as they’ll likely set the tone for the final quarter of the year.

Our predictions

While the recent reversals are encouraging, we still believe caution is warranted. Here’s what we’re watching for in the near term:

1. A potential 5-10% pullback

The market hasn’t experienced a significant pullback in several years, and history tells us that corrections are both normal and healthy. A 5-10% pullback allows for repricing and creates opportunities for investors to buy high-quality stocks at more attractive valuations.

2. A shift in sector leadership

As the market stabilizes, we expect leadership to shift toward sectors that are less impacted by inflation and rate hikes. Technology, consumer discretionary, and export-heavy industries may see renewed interest as inflation pressures ease and the dollar weakens.

3. Long-term opportunities

For patient investors, this period of volatility presents an opportunity to build positions in fundamentally strong companies. By focusing on data-driven insights and staying disciplined, traders and investors alike can navigate this environment with confidence.

Final thoughts

The stock market is showing signs of resilience, but it’s important to remain level-headed. While key catalysts like bond yields, the dollar, and oil prices are moving in the right direction, upcoming events like the Fed’s decision and GDP numbers could still sway market sentiment.

At Signals, we encourage a balanced approach. Watch for opportunities as the market stabilizes, but remain prepared for potential volatility. By leveraging real-time data and staying informed, you can make smarter investment decisions and capitalize on the opportunities ahead.