December 2, 2024

“Don’t look for the needle in the haystack. Just buy the haystack!”

John Bogle

The markets continued their winning ways on this holiday shortened week, but first here are the numbers. The S&P 500 gained 1.48%, the Dow Jones Industrial Average added 2.37%, and the Nasdaq was up 1.33%. Internationally, The FTSE 100 joined in the fun up by .31%, and the MSCI-EAFE gained .14%. The 2-year treasury paid 4.136%, and the 10-year closed with a yield of 4.178%.

So, what happened while our turkeys were cooking? Last Monday and Tuesday the equity markets continued on a tear but pulled back on Wednesday ahead of the Thanksgiving Day holiday. The pullback is a sign of caution ahead of the holiday weekend but likely not the precursor to a larger decline. An unchanged outlook for earnings and capital return growth supports the market. The forecast is for earnings to grow by double-digits in 2025 and drive capital returns to record levels. Because tailwinds are likely to form, the forecasts for 2025 earnings growth are likely cautious. However, U.S. stocks finished off their best month in a year last Friday, with the Dow and S&P 500 clinching fresh record closing highs to cap off a blockbuster November.

And what about inflation? The risk is inflation. The PCE Price Index for October was as expected, with core inflation rising to a six-month high, contrary to a rate reduction environment. In this scenario, the Fed may pause its rate reductions until inflation begins to cool again. It is possible that Trump’s business and consumer-friendly policies will invigorate inflation and keep the FOMC from cutting rates in 2025 at all. However, the S&P 500 will likely continue to rise because of the underlying economic strength that drives inflation.

Consumer sentiment? From Market Watch, consumer confidence climbed to a 16-month high, and Americans grew more optimistic about 2025, buoyed by rising stock prices, slowing inflation and a robust U.S. jobs market. The index of consumer confidence rose to 111.7 in November from a revised 109.6 in October, the Conference Board said Tuesday. It’s the highest reading since mid-2023. The confidence of consumers is closely tied to the health of the labor market and the index is often a bellwether whether the economy is getting better or worse.

Economic growth? As Barrons Jeffry Bartash reports, The U.S. economy grew a 2.8% annual pace in the third quarter, revised figures showed, and indicated the economy headed into the crucial holiday shopping season with plenty of momentum. The increase in gross domestic product, the official scorecard of the economy, was unchanged from an initial 2.8% estimate last month. Economists polled by MarketWatch had forecasted GDP to remain the same.

Consumer spending, the lynchpin of GDP growth, expanded at a frothy 3.5% rate, down from the original 3.7% estimate. Consumer spending accounts for more than two-thirds of everything that goes on in the economy. Salesforce released a report showing that Thanksgiving weekend e-commerce sales topped $33 billion in 2024, a 6% increase over last year. The most interesting number? 72% of the revenue came from transactions on mobile devices. Adobe released their own sales figures, showing that the U.S. alone spent $6.1 billion on Thursday, up nearly 9% from last year’s $5.6 billion.

And Interest rates? Market Watch’ William Watts notes that Fed funds futures traders appeared to back away a little further from the notion of a pause by rate-setting policy makers following a PCE inflation reading for October that matched Wall Street’s expectations. “Overall, there was nothing in the data set that would alter the Fed’s thinking regarding a cut/pause next month,” said Ian Lyngen, rates strategist at BMO Capital Markets, in a note to clients. The market is pricing in a 66.5% probability of a 25-basis point cut to the fed-funds rate on Dec. 18, up from 59.4% on Tuesday, according to the CME FedWatch Tool.

Housing and Mortgages? After a few months of weakening data, home sales reports finally ticked higher, giving investors new hope for a rebound in the real estate sector. However, there is no reason to start celebrating yet, as other factors and themes need to fall back into line before the skies are clear for the industry. One month of positive data isn’t enough to erase quarters of contraction. Interestingly, new mortgage applications got a bump despite still high mortgage rates after President Trumps reelection. Optimism in the Gen Z demographic of good things to come? That’s my best guess.

Exactly three weeks after President-Elect Donald Trump won the Electoral College and national popular vote, he finished selecting the men and women who would fill the Cabinet of his second administration. Absent any potential use of recess appointments to approve their appointments, the Senate will still need to confirm Trump’s choices next year. Last week, President-Elect Trump pledged on social media to impose a 25% tariff on goods from Mexico and Canada, and to raise tariffs on China by “an additional 10% tariff, above any additional tariffs.” The President-Elect warned that the tariffs would remain until the three nations cracked down on drugs and illegal immigrants entering the U.S. This prompted both the Mexican President, and the Canadian Prime Minister to come running for a sit down with President-Elect Trump. The most telling comment by Prime Minister Trudeau was “if he says he will do something, he will.”  Early indications the threat was enough to force desired changes in Canadian and Mexican border policies.

So, looking ahead to 2025, again Market Watch reports, U.S. stocks have been powering to fresh record highs in the final leg of 2024, with investors getting a second wind from promises of deregulation, tax cuts and tariffs from a second Trump administration and its “America First” agenda. November’s election and Republican “red sweep” have been tied to anger about the economy and inflation. Both have been creeping higher lately, albeit in a “goldilocks” zone for now. Yet the economy and inflation will be critical as the Federal Reserve weighs how much to lower rates next year. They also might pose a challenge to Wall Street forecasts that call for a third straight year of big gains for stocks. But overall, the opinion on the street is that the bulls will still be running into next year. Small Caps still look good to us and several value sectors. Especially energy, which will benefit from the new sheriff in town.

Hoping you all enjoyed the holiday with your family and friends as we live through these very historic times for our country, I’m sure your table discussions were quite lively.

Mike