Weekly Market Update – December 13, 2024

Quick Takes

• It was a mixed week for the major U.S. stock indexes, with the S&P 500 Index snapping a three-week win streak, falling -0.6%, while the small cap Russell 2000 Index recorded a second consecutive week of underperformance against the S&P 500, dropping -2.6%. 
• The Nasdaq Composite Index bucked the downward trend, extending its win streak to four straight weeks with a +0.3% gain for the week. The index also closed above the 20,000 level for the first time ever on Wednesday.
• It was a bit of a rough week for bond investors, too, as the yield on the 10-year U.S. Treasury note rose all five days last week for a total increase of +24 basis points for the week, to finish with a yield of 4.40%. The Bloomberg U.S. Aggregate Bond Index fell -1.4%.

Source: Bloomberg. Data as of December 13, 2024.
Price Returns for Equity, Total Returns for Bonds.
* The term basis points (bps) refers to a common unit of measure for interest rates and other percentages in finance. One basis point is equal to 0.01%. Bond prices and bond yields are inversely related. As the price of a bond goes up, the yield decreases.

Stocks mostly down, bonds sink

It was a mixed week for the major U.S. stock indexes. The S&P 500 Index snapped a three-week win streak, slipping -0.6% for the week. Bad market breadth and hotter than expected wholesale inflation and import prices took the steam out of most U.S. stocks. For the S&P 500, it has been on a ten-day streak of negative market breadth—meaning there have been more stocks declining than stocks advancing in the index for ten consecutive trading days. The last time that occurred was in the aftermath of 9/11 in 2001. Sector breadth was also poor, with just two of the 11 S&P sectors advancing (Consumer Discretionary and Communication Services were up +1.2% and +0.1%, respectively). Looking at last week’s inflation data, the Consumer Price Index (CPI) for November came in line with estimates, but the headline figure still notched its highest month-over-month reading since April. Furthermore, Producer Price Index (PPI) readings came in hotter than anticipated, accelerating higher when declines were forecast. Large-cap stocks held up better than their smaller-cap counterparts as the small cap Russell 2000 Index recorded a second consecutive week of underperformance against the S&P 500, dropping -2.6% last week. The Technology sector was down -0.7% for the week, but the tech-heavy Nasdaq Composite Index managed to extend its winning streak to four weeks with a +0.3% advance for the week. It also closed above the 20,000 level for the first time ever on Wednesday. Despite the stubborn inflation data, market participants are almost certain that the Federal Reserve will deliver a quarter-point rate cut at its final monetary policy decision of the year on Wednesday afternoon.

Non-U.S. stocks were also mixed. Developed market international stocks (as measured by the MSCI EAFE Index) fell -1.5%, but emerging market stocks (the MSCI Emerging Markets Index) eked out a +0.2% gain. The European Central Bank (ECB) lowered its key policy rate by a quarter of a percentage point to 3.0%, the fourth reduction this year. The ECB appeared to leave the door open to ease monetary policy further, but investors have questioned whether the ECB has been easing monetary policy fast enough to support the struggling economy. The Swiss National Bank (SNB) surprised markets with a larger-than-expected half-percentage-point reduction on the same day—its biggest rate cut since January 2015. The U.K. economy has slowed significantly after a strong start to the year as real gross domestic product (GDP) in October unexpectedly shrank -0.1% sequentially, following the same magnitude of contraction in September. The gain for emerging markets came despite Chinese stocks falling and Brazil’s central bank raising its key interest rate by 100 basis points (1.00%) from 11.25% to 12.25%. Brazil’s central bank promised to raise by another +100 basis points at each of the next two meetings, which would send rates there to the highest levels since at least 2016. 

It was a bit of a rough week for bond investors as the yield on the benchmark 10-year U.S. Treasury note rose all five days last week for a total increase of +24 basis points for the week, to finish with a yield of 4.40%. Bond prices and yields move in opposite directions and the Bloomberg U.S. Aggregate Bond Index fell -1.4% after gaining +0.5% the prior week. Non-U.S. bonds, as measured by the Bloomberg Global Aggregate ex U.S. Bond Index, were down -1.2% for the week after the prior week’s +0.2% increase.

The Week Ahead

With third quarter earnings season all but over and last week’s inflation reports in, investors will likely turn their attention to this week’s meeting of the Federal Open Market Committee (FOMC). It is expected that Fed policymakers will deliver another 25 basis point rate cut at the conclusion of the two-day FOMC meeting on Wednesday afternoon. Other notable central bank activity includes the Bank of England and Bank of Japan who both announce monetary-policy decisions on Thursday.

Beyond central banks, other economic data to watch next week includes the S&P Global US Manufacturing and Services Purchasing Managers’ Indexes for December on Monday, as well as Industrial Production and November Retail Sales on Tuesday. The Bureau of Economic Analysis (BEA) releases the third and final estimate of third quarter GDP on Thursday morning. The BEA also reports the Personal Consumption Expenditures (PCE) Price Index for November on Friday. A slug of housing data is also due during the week, with Homebuilder Confidence from NAHB on Tuesday, weekly mortgage applications plus Building Permits and Housing Starts on Wednesday, and Existing Home Sales on Thursday.

Chart of the Week

Wholesale inflation picked up in November. The headline Producer Price Index (PPI) was up +0.4% for the month, above expectations for +0.02% and the +0.3% rise the prior month (revised higher for the original +0.2% reading). Year-over-year (YoY) PPI increased to +3.0%, above expectations for +2.6% and up from the prior month’s +2.6% rate (which was revised up from +2.4%). That was the biggest advance since February 2023. Wholesale food costs shot up +3.1% — the biggest increase in two years — largely because the wholesale cost of eggs surged +55% due to a major outbreak of bird flu that has resulted in the slaughter of huge numbers of chickens. Core PPI, which strips out volatile food and energy costs, was up +0.2%, in line with expectations but down a tick from last month’s +0.3% (revised higher from the original +0.2%). YoY Core PPI was up +3.4%, above expectations for +3.2% and in line with the prior month (though that was revised up from +3.1%). The cost of services, the biggest source of recent inflation, rose a mild +0.2% in November but are up +3.9% in the past year, which is too hot for the Fed’s liking. However, the cost of Unfinished Goods and Raw materials remained quite tame. Both categories show declines over the past year, which will help keep inflation in check. But the primary takeaway from the report is that wholesale inflation is moving in the wrong direction, particularly higher food prices, which risks putting pressure on consumer prices in the future. 

Wholesale Inflation Hotter Than Expected

Monthly Producer Price Index (November 2021 – November 2024)

Source: U.S. Bureau of Labor Statistics via FRED, CNBC.

Did You Know?

ELECTION YEAR GAINS – The S&P 500 was up 20%+ entering December of this presidential election year. This occurred during four other election years (1928, 1936, 1980, 1996), and in three of those four years (1936, 1980, 1996), the index finished down in December, for an average drop of -2%. (Source: Bespoke)

HAPPY FARMERS – Farmer sentiment increased to the most optimistic levels since May 2021 in November as the Ag Economy Barometer surged +30 points versus October for its largest ever monthly increase since its inception in 2015. Only 9% of farmers expect environmental regulations impacting agriculture to be more restrictive over the next five years. (Sources: Purdue/CME Group)

COST OF FINANCIAL ILLITERACY – The average American estimated that they lost roughly $1,500 due to a lack of knowledge about personal finances in 2023. That equates to around $388 billion in losses for US adults during the year due to financial illiteracy. (Source: National Financial Educators Council)

This Week in History

BIG APPLE – December 12, 1980, Apple (AAPL) went public through an Initial Public Offering (IPO) as Apple Computer. Five million shares were issued at $22 a share. Today, Apple is the largest stock in the world, with a market capitalization of $3.74 trillion. If you had invested $10,000 in Apple’s IPO and held it until Friday, you’d currently have approximately $25,424,000. (Source: The Wall Street Journal)

Economic Review

• U.S. Household Net Worth surged to another record high in the third quarter, fueled by large gains in stock prices that are also near all-time highs, more than offsetting a slight decline in real estate holdings. Household Wealth rose $4.77 trillion to $168.8 trillion following a $2.81 trillion gain in the second quarter (revised up from $2.76 trillion). Household Net Worth increased on a year-over-year basis by +11.4% after a +7.2% gain in the second quarter. Household Liabilities rose modestly to $20.9 trillion from $20.7 trillion the prior quarter. As a result, the Household Debt-to-Asset ratio fell to 11.2%, just shy of the 50-year low of 11.1% in the first quarter of 2022. Household liquidity hit a record as cash deposits, which include savings and checking accounts and money market funds, gained $379.5 billion to $18.9 trillion.
• The rate of inflation for consumer goods and services was up a bit in November but in line with expectations. The headline Consumer Price Index (CPI) was up +0.3%, as expected, which was slightly higher than the unrevised +0.2% the prior month. Likewise, the year-over-year (YoY) CPI grew at a +2.7% rate, up from an unrevised +2.6% rate, but matching expectations. Core CPI, which excludes the more volatile food and energy prices, was up +0.3% for the month, the fourth straight month at that level, which is where it was expected to remain. YoY Core CPI was +3.3%, also unchanged from the prior month and matching expectations. The Federal Reserve and Wall Street generally considers the Core CPI as a better predictor of future inflation. 
• Imports Prices rose +0.1% in November, versus expectations for a decline of -0.2% and following a +0.1% increase the prior month (revised lower from the originally reported +0.3%). Import Prices ex Petroleum were up +0.2%, unchanged from the unrevised level the prior month but hotter than the expected flat (0.0%) reading. The cost of imported fuel was +1% higher, while nonfuel import prices were unchanged. Export Prices were flat at 0.0%, more than the expected decline of -0.3%. The prior month was revised higher, too, to +1.0% from +0.8%. Export prices accelerated to +0.8% over the past year, sharply higher than expectations for a +0.3% drop and last month’s +0.1% annual rate (revised higher from the originally reported -0.1%).
• Major contributors included the usual suspects: Shelter remains a notable driver, increasing by +0.3%, accounting for nearly 40% of the total monthly rise. Shelter costs remain stubbornly high on a YoY basis as well, up +4.7% from last year. Food prices rose +0.4%, with the Food-at-Home index up +0.5%, driven by surges in Beef (+3.1%) and Eggs (+8.2%). Energy was up a modest +0.2% after a flat October, but year-over-year Energy prices were down -3.2%. A notable detractor was Cereals and Bakery Products, which fell by -1.1%—the largest single-month drop in the index’s history. Material decliners were present in the YoY changes of Oil and Gasoline, down -19.5% and -8.1%, respectively. The report further solidified the market outlook for a -0.25% cut this Wednesday, with traders raising the odds to 99%, according to the CME Group FedWatch tool.
• The National Federation of Independent Business (NFIB) reported that their Small Business Optimism Index rose to 101.7 from an unrevised 93.7 the prior month. That is the highest level since June 2021, the largest sequential increase since July 1980, and the first reading in 35 months above the 50-year average of 98. All 10 component indexes rose except for the Current Inventory component, which was unchanged from the prior month. The biggest improvement came from the Expect Economy to Improve component, which was up +41 points to a net +36% reading, the highest since June 2021. Expect Real Sales Higher was also up a strong +18 points to a net to +14%, the highest since June 2020 before the COVID shutdowns. Current Job Openings ticked +1 point higher to a net +36%, which is tied for the highest overall component. The separate Uncertainty Index hit a record high of 110 last month, it declined -12 points in November. “The election results signal a major shift in economic policy, leading to a surge in optimism among small business owners,” said NFIB Chief Economist Bill Dunkelberg.
• The Census Bureau reported Wholesale Inventories rose +0.2% to $905 billion in October, matching expectations of the preliminary estimate and reversing the prior month’s -0.2% decline. Year-over-Year (YoY) inventories were up +0.9%, matching the preliminary reading and up from just +0.5% the prior month, but still well below the typical +4% to +6% annual increase in strong economies. Inventories are goods produced for sale that have not been sold yet. Inventories have only added to GDP growth once in the past five quarters and subtracted -0.2 percentage points from the headline annual increase in GDP ( +2.8% ) for the third quarter. Wholesale Trade Sales slid to +0.1%, down from the prior month’s +0.5% (revised higher from +0.3%) and below expectations for +0.2%. Wholesale inventories data isn’t adjusted for inflation. The Inventory-to-Sales Ratio was unchanged at 1.34 months but has trended lower for the last year. The ratio reflects how long it would take a company to sell all the goods sitting on warehouse shelves. 
• The U.S. Treasury Department recorded a Federal Budget Deficit of $366.8 billion in November, the second month of fiscal 2025. That compares to $314.0 billion a year ago. Both receipts and outlays rose, with the latter outpacing the former, as receipts were $301.8 billion while outlays were $668.5 billion. Individual Income Taxes were the largest source of receipts ($138 billion), followed by Social Insurance & Retirement receipts ($131 billion). The largest outlays by function were Medicare ($129 billion), Social Security ($125 billion), Health ($80 billion), and Net Interest ($79 billion), which exceeded the outlay for National Defense ($76 billion). The fiscal year-to-date deficit is $624.2 billion versus $380.6 billion for the same period a year ago (the government’s fiscal year runs from October through September). The outsize increase in spending was due to timing adjustments, as certain payments scheduled for December 1, a non-business day, were accelerated into November. If not for these timing shifts, the federal deficit year to date would be about $82 billion smaller than recorded. The budget deficit over the last 12 months is $2.076 trillion. The Treasury Budget data are not seasonally adjusted, so the November deficit cannot be compared to the October deficit of $257.5 billion.
• Weekly MBA Mortgage Applications rose +5.4% for the week ending December 6, following the prior week’s +2.8% gain. The Purchase Index was down -4.1% following a +5.6% rise the prior week. The Refinance Index jumped +27.2%, following the prior week’s -0.6% decline. The average 30-Year Mortgage Rate slipped to 6.67% from 6.59% the prior week.
• Weekly Initial Jobless Claims rose +17,000 to 242,000 for the week ending December 7, worse than expectations for 220,000. The prior week was revised up by 1,000 from the original 224,000 reported. The number of people already collecting unemployment claims (i.e., Continuing Claims) rose +15,000 to 1,886,000 in the week ending November 30, more than expectations of 1,877,000. Last week’s reading of 1,871,000 was left unrevised.

Asset Class Performance

Source: Bloomberg.

Asset‐class performance is presented by using market returns from an exchange‐traded fund (ETF) proxy that best represents its respective broad asset class. Returns shown are net of fund fees for and do not necessarily represent performance of specific mutual funds and/or exchange-traded funds recommended by The Retirement Planning Group. The performance of those funds may be substantially different from the performance of the broad asset classes and to proxy ETFs represented here. US Bonds (iShares Core US Aggregate Bond ETF); High‐Yield Bond (iShares iBoxx $ High Yield Corporate Bond ETF); Intl Bonds (SPDR® Bloomberg Barclays International Corporate Bond ETF); Large Growth (iShares Russell 1000 Growth ETF); Large Value (iShares Russell 1000 Value ETF); Mid Growth (iShares Russell Mid-Cap Growth ETF); Mid Value (iShares Russell Mid-Cap Value ETF); Small Growth (iShares Russell 2000 Growth ETF); Small Value (iShares Russell 2000 Value ETF); Intl Equity (iShares MSCI EAFE ETF); Emg Markets (iShares MSCI Emerging Markets ETF); and Real Estate (iShares US Real Estate ETF). The return displayed as “Allocation” is a weighted average of the ETF proxies shown as represented by 30% US Bonds, 5% International Bonds, 5% High Yield Bonds, 10% Large Growth, 10% Large Value, 4% Mid Growth, 4% Mid Value, 2% Small Growth, 2% Small Value, 18% International Stock, 7% Emerging Markets, 3% Real Estate.

* The term basis points (bps) refers to a common unit of measure for interest rates and other percentages in finance. One basis point is equal to 0.01%. Bond prices and bond yields are inversely related. As the price of a bond goes up, the yield decreases.