December 23, 2024

“What goes up must come down”
Sir Isaac Newton

 Merry Christmas and Happy Holidays to all!

 I know I have used this quote before, but is particularly appropriate in view of the last two weeks market performance. But first, here are the numbers. The S&P 500 surrendered 2.19% last week, the Dow Jones Industrial Average not to be outdone fell 2.25%, and the Nasdaq lost 2.6%. Internationally, the FTSE 100 finished the week in the tank down 2.6% and the MSCI-EAFE lost 4.2%

As Gemmer Global reports (My chart watching colleagues notes) “Unfortunately, there wasn’t much festive cheer to be had this week after the Fed meeting knocked both bonds and stocks down a peg or two.  But while the selling came at us quickly on Wednesday and Thursday, the actual losses from recent highs are relatively muted. Even the beleaguered small-cap index hasn’t hit the -10% threshold to qualify as a correction.  It is notable, though, that both bonds and stocks have lost ground at the same time, and this speaks to the nature of the driving forces behind this latest move. Both stocks and bonds are, at the end of the day, trying to price in a very uncertain trajectory for inflation over the coming quarters.  Big picture wise, ever since late 2022, it has been clear that the rate of change in inflation was slowing, as core PCE inflation retreats, but the CPI numbers are similar).  So, it appears the easy gains are clearly behind us. “

The PCE, the Feds preferred inflation measurement, was actually better than expected when made public last Friday.  The PCE for November showed the following: The month-over-month change indicated a number below target, about +1.4% on an annualized rate.  It looks like inflation is stabilizing around the +2.5% level, 50bps above target. This isn’t really much of a shock to anyone.  Plenty of pundits have made the case that inflation was going to run hotter in the post-COVID world, and this seems to be playing out.  What changed on Wednesday, though, was that the Fed acknowledged it as well. However, this didn’t stop The Federal Reserve from cutting rates another quarter-point this week, but everything else associated with the meeting was on the hawkish side. Futures-markets were pricing in roughly 10% odds of a rate cut at the FOMC’s next meeting on Jan. 28-29. First, the Fed made it clear that they only are planning to cut twice next year.  They had been talking about four cuts back in September.  And more importantly, the Fed doesn’t think they will hit their 2% inflation goal in 2025.  They really aren’t that sure about 2026 either.

They increased their core PCED inflation forecast by 0.3% for 2025, from 2.2% to 2.5%. Such a change in expectations is a big deal for bond investors.  If inflation is likely to be higher for longer, it implies that policy rates are going to be higher for longer as well.   Actually, the move in yields this week was historic.

So, what happened last Friday to head off the disaster? Barron’s Reports: Traders and investors bought the dip last Friday, sending stocks higher in a broad rally to end the last full trading week of 2024. Santa came a bit early this year, it appears. The Dow Jones Industrial Average added 1.2%, the S&P 500 rose 1.1%, and the Nasdaq Composite climbed 1.0%. Significantly, nearly 450 of the stocks in the S&P 500 closed higher, as all 11 sectors gained. And it was apparently a high-conviction rally. Some 21.7 billion shares changed hands on U.S. exchanges today, the largest volume day in almost four years. For comparison, the average daily trading volume so far this year is 11.6 billion. I must add the volume numbers had to be affected by “Triple Witching Day” which is when option traders must cover any outstanding positions, normally a very high-volume day in the trading pits.

In other economic news, initial U.S. jobless claims drop to 220,000 in Dec. 14 week from 242,000 in the prior week, continuing jobless claims decline by 5,000 to 1.87 million U.S. GDP growth in third quarter revised up to 3.1% from 2.8%.  Adding to the concern, Philadelphia Fed manufacturing survey tumbles to -16.4 in December from -5.5 in November. So, expect a choppy start to next year.

In other news. President Joe Biden on Saturday signed legislation that averts a government shutdown heading into Christmas, bringing a final close to days of upheaval in Washington after Congress passed a bipartisan budget plan just past the deadline and rejected Donald Trump’s core demand in the negotiations. The deal funds the government at current levels through March 14 and provides $100 billion in disaster aid and $10 billion in agricultural assistance to farmers. One must ask oneself, if all but 6% of federal workers actually are going into work, and key essential services would still be funded, and every time we have a shutdown, (with the exception of hikers at national parks) no one notices, maybe this is nothing more than a political blame game. One thing is certain: with the new administration’s objective, this ramming through continuing resolutions at a minute before midnight will have to stop. Our government must return to regular order (that means transparency and accountability,) to Elon and Vivek, good luck!

Finally, on the housing front, U.S. home sales rebound as buyers seize on a dip in mortgage rates. However, the US Housing markets are far from a return to normal.  New-home construction dips 1.8% in November to a 1.29 million pace.  New-home construction falls more than the forecasted 1.34 million pace.  Housing starts fall to lowest level in four months, single-family housing starts rise 6.4%, multi-family housing starts plunge 24.1%.  Building permits rise 6.1% in November to 1.51 million pace. Building permits rise to 9-month high.

Just a fun Fact Michael Jordan final sold his famous Highland Park home after 13 years for 1/3 ($9.5million) of the original asking price ($29 Million). I guess sports fans do have limits when it comes to money.

As we look to 2025, we expect continued nervousness and some further correction, but all in all in 2025 we are looking cautiously optimistic for the bull market to continue.

Mike