Market Update - Major U.S. equity markets closed out the final month of 2024 in a mixed fashion, with megacap tech being the bright spot and industrials heading lower. Courtesy of the Fed's change in tone, Santa Claus did not show up in rally mode at the end of December. We saw some quarter-end and year-end book squaring the last week of the month. Chatter and growth surrounding continued advancement in AI and now quantum computing dominate many growth-oriented conversations. For December, the S&P 500 decreased by 2.50%, the Nasdaq 100 reached an all-time monthly closing high, settling higher by 0.39%, and the Dow Jones Industrial Average fell by 5.27%.
Stocks: Strong Year, Weak Month - Through all the headlines, the interest rate cycling and presidential elections, it has been a positive two-year stretch in major U.S. stock indexes (the best two-year stretch since 1998). At this time, tariff concerns, interest rate uncertainty, jobs uncertainty, and a Fed slowing its rate-cut campaign caught up to market sentiment. Pullbacks are often viewed as healthy in bull markets and it is expected that AI will continue to garner attention heading into 2025.
Rising Bond Yields - Bonds were good to investors for most of 2024, but December changed that tune quickly with rising yields. With inflation being deemed stubborn on the consumer level, 10-year note yields responded in a big way in December, tacking on nearly 39.5 basis points and settling December near the 4.573% level. Uncertainty in fixed income remains over future economic policy and a Fed with a more hawkish stance heading into 2025. With 5% being the cycle high so far after the Fed hikes in 2023, the fixed income allocation in our portfolio remains short-term and diversified amid an uncertain outlook regarding inflation and interest rates in a new administration.
Inflation - The final phase of tackling inflation is taking longer than many would hope to see. Consumer Price Index (CPI) data for November showed a monthly increase of 0.3%, raising the annual rate to 2.7%, up from 2.6%. The housing and services sectors continue to drive inflation metrics higher, though shelter prices may be stabilizing. Despite CPI and Producer Price Index (PPI) remaining above the Fed's 2% target, market reactions were optimistic, suggesting an increased likelihood of a rate cut in December, and the Fed delivered on that optimism. Core CPI, which excludes food and energy, rose by 3.3% year-over-year and 0.3% month-over-month. Major U.S. equity indexes reacted positively to the consumer inflation data upon release, but by week's end, results were mixed, with the Fed signaling a shifting tone on interest rates for 2025. The Dow Jones and S&P 500 declined, while the Nasdaq 100 gained on the week of the CPI data release. Sentiment has been tempered somewhat since, and PPI data warranted additional caution.
Fed Tone Pivot & Interest Rate Expectations - The Fed cut the benchmark overnight lending rate at its December meeting by 0.25%, bringing the target rate to 4.25%-4.50%, meeting market expectations. The move came after a 0.50 cut in September and a 0.25 cut in November. The Fed also indicated that it is looking at two interest rate cuts in 2025 versus the four that it had projected at the September meeting. This shift to a less-dovish Fed created a surge in volatility across financial markets. As January began, the feeling across markets was that we saw some year-end short-term profit-taking and book squaring across many assets.
Overall Economic Data - Mixed data continues to be released by the Bureau of Labor Statistics. Friday’s report shows nonfarm payrolls increasing by 256K in December, driven by jobs in health care, government, and social assistance, and topping the consensus estimate of +157K by a wide margin. November's number is revised down to +212k from its initial estimate of +227K. The unemployment rate decreased to 4.1% vs. 4.2% consensus and 4.2% prior month. Average hourly earnings increased 0.3% month over month, in line with consensus, and down from +0.4% in November. On a year over year basis, average hourly earnings rose 3.9%, less than the +4.0% expectation and slowing from +4.0% pace in the prior month. The labor force participation rate remained at 62.5% in December and has stayed in the 62.5%-62.7% band since December 2023. As we review overall economic data and the expectation of a soft landing, we feel the market is overreacting due to the slowdown of the Fed & mixed data being reported. As markets are pulling back, this could create opportunities for investors with cash on the sidelines.
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