December 16, 2024

December 16, 2024

It’s hard, when you’re up to your armpits in alligators, to remember you came here to drain the swamp.

Ronald Reagan

Let’s see if it begins next month.

Friday the 13th proved to be modestly negative for the markets, with both bonds and stocks slipping.  The lackadaisical week seems appropriate as after all the fireworks in the past few months the market seems to need a breather. There’s a definite sense of wanting to close the books on the year trading-wise. But from an economic perspective, the force seems strong in the U.S. economy. Last week’s jobs number was solid, reversing October’s miss. But first here are last week’s numbers.

The S&P 500 was off .52%, the Dow Jones Industrial Average finished down 1.81%, and the Nasdaq was the bright spot up.52%. Internationally, the FTSE 100 was almost flat off.10%, and the MSCI-EAFA matched the loss of the Dow off 1.51%. The 2-Year treasury finished paying 4.245% and the10-Year yielded 4.395%.

The Equity markets pulled back last Thursday following a hotter-than-expected inflation report. The PPI index advanced compared to last year, accelerating at the headline level and sustaining a 3.5% at the core, underpinning an expectation for consumer inflation to run hot in December. The takeaway is that FOMC has less need to lower interest rates than ever, and it may surprise the market next week when it meets. With CPI and PPI running hot, they will be hard-pressed to justify a cut, more so a dovish posture for 2025. Investors should expect the Fed to indicate a pause in the lowering cycle at the very least. That said, this week all eyes are on the Fed which meets, and still despite the PPI number, the odds favor another quarter-point cut.   It would be very unusual for the Fed to surprise/disappoint the markets when expectations are so lopsided. As Gremmer Asset analysts’ comments but given the economic head of steam the U.S. seems to have, many are talking about a so-called ‘hawkish cut.’   This basically means that the commentary from the Fed this Wednesday is likely to shift towards a pause in rate cuts in January.  This comment from JP Morgan captures the general view:

“At the conclusion of next week’s FOMC meeting we expect the Committee will lower the target range for the fed funds rate by 25bp to 4.25-4.5%. We don’t look for major changes in the statement language or the forward guidance, even though we still think a pause is likely at the January meeting. We think that the economic forecasts will show better growth and firmer inflation this year, and that the median interest rate forecast dots will be revised to show three cuts next year instead of four…” It’s a decent bet that Powell takes a more hawkish tone than this, but we shall see.  As for the expectation for three cuts next year, this hinges to a large degree on what the incoming administration’s policy priorities are going to be.  It will be interesting to hear if Powell acknowledges this uncertainty.  There’s a relatively small but growing chance that next week’s rate cut could be the last one for a while, at least in the U.S.    

And the Market expectations?  Wall Street analysts see little evidence of any near-term slowdown. For the fourth quarter, they expect companies in the S&P 500 to generate earnings growth of 11.8%, according to FactSet. That would be the best quarter in three years. And those analysts see a fourth-straight year of overall earnings growth in 2025, with an S&P 500 year-end price of 6,600 — 10% above current levels. A lot will have to do with the next administration’s policies but judging from the lovefest at the New York Stock Exchange last week when President elect Trump rang the opening bell, and the fact that every business leader and Tech giant is trying, very transparently, to bend a knee and curry favor, these projections seem in order.

Outside of the big Fed meeting this week, in other economic and market news, as Barron’s Nicholas Janinsky reports, The National Federation of Independent Business’ small business optimism index jumped by 8 points in November, to 101.7—its highest level since June 2021. The gap between survey respondents expecting a better economy ahead and those who don’t surged to +36%, from -5% a month earlier, the new data show. “The election results signal a major shift in economic policy, leading to a surge in optimism among small business owners,” NFIB Chief Economist Bill Dunkelberg said in a statement. “Main Street also became more certain about future business conditions following the election, breaking a nearly three-year streak of record high uncertainty.”

the U.S. Bureau of Labor Statistics releases import and export price data for November. The consensus call is for both import and export prices to decline 0.3% month over month. This compares with gains of 0.3% and 0.8%, respectively, in October.

Speaking of exports, overseas the popular press is full of stories about the economic headwinds in Europe and Asia.  There is a myriad of examples, but just this week we found out that U.K. GDP contracted for the second month in a row….and that Chinese bond yields fell below Japan’s for the first time, well maybe ever (the data is, as you would expect, patchy).  This is viewed as a sign of building deflationary pressures in China. So, in a practical sense what this all means is that policy is easing much quicker overseas.  Again, just this week the European Central Bank cut rates. In the pacific, the markets seem to ignore a mini coup in South Korea and is digesting this potentially deflationary pressure. One thing is certain the new administration will dramatically change foreign policy and unlike before, will take what the US government says it will do at face value.

Finally on housing… The report showed a slowing of housing-related inflation in November. That’s been a challenging category of the index, with a large weight and stubbornly high inflation. Barron’s Megan Leonhardt reports the details: The shelter index increased 0.3% in November, a slowdown from the 0.4% pace in October, the Bureau of Labor Statistics reported Wednesday. But whether that will be a sustained slowdown remains to be seen. The metric has been volatile throughout the year, slowing or accelerating each month. Shelter inflation still measured 4.7% year over year in November. The details within housing price growth, however, were a bit more optimistic last month. The bureau’s owners’ equivalent rent metric rose 0.2% over the month in November, the smallest one-month increase since April 2021. Rent prices also rose 0.2% month over month in November, the smallest one-month increase since July 2021, the bureau reported. Slowing down housing-related price growth is a key element in the last mile of the Federal Reserve’s inflation fight. Traders took today’s report as a green light for an interest-rate decrease next week: Futures pricing now implies a roughly 95% likelihood of a quarter-point cut in the federal funds rate on Dec. 18. “While overall progress may be slower than we would like, the details of today’s report have some encouraging news that should keep the Fed confident that inflation will eventually work its way lower,” Eric Winograd, Alliance Bernstein’s director of developed economic market research, wrote last week.

Looking forward, we will begin to focus a bit more on the US markets and trim our foreign exposure, last Wednesday’s inflation report comes as “a relief to a market that did not want any surprises interrupting this year-end Santa rally,” according to Lara Castleton, Janus Henderson Investors’ U.S. head of portfolio construction and strategy. So, back on Wall Street there’s plenty of optimism, as well, with stock indexes just below record highs and trading at premium valuation multiples. Our attitude is to ride along.

Mike