Weekly Market Update – December 20, 2024

Quick Takes

• Wall Street didn’t like the message Federal Reserve Chairman Jerome Powell delivered on Wednesday and sent the S&P 500 Index down -2.0 for the week; the tech-heavy Nasdaq fell -1.8%, and the small cap Russell 2000 Index sank -4.5%. 
• Fed policymakers are now projecting higher inflation and fewer rate cuts in 2025, with chair Jerome Powell stressing caution going forward. The Fed indicated it only plans to cut rates twice in 2025 instead of the four cuts it projected last fall.
• The weeks of the Christmas and New Year’s holidays typically see low trading volume but positive action for investors in the stock market. Per Barron’s, since 1950, the S&P 500 has gained an average of +1.3% over the Christmas and New Year’s holidays.

Source: Bloomberg. Data as of December 20, 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.

Markets deliver a lump of coal ahead of the holidays

Wall Street suffered its worst weekly loss since mid-November as Federal Reserve Chairman Jerome Powell delivered investors a reality check on exuberant forward expectations. On Wednesday, the Fed delivered a quarter-point interest rate cut, exactly as expected. But it was Powell’s press conference commentary and the Fed’s updated Summary of Economic Projections, the so-called “dot plot,” that sank investor sentiment. Fed policymakers are now projecting higher inflation and fewer rate cuts in 2025, with chair Jerome Powell stressing caution going forward. That was not what markets wanted to hear, and stocks sank Wednesday afternoon, with the S&P 500 falling -3.0 for the day, the tech-heavy Nasdaq Composite Index sinking -3.6%, and the small cap Russell 2000 Index plunging -4.4%. Markets did recover on Friday, however, to help claw back some of the week’s losses. A soft November Core Personal Consumption Expenditures Price (PCE) Index reading—the Fed’s preferred inflation gauge—on Friday morning helped offset the Fed’s hawkish tilt on Wednesday. For the week, the S&P 500 fell -2.0%, the Nasdaq was down -1.8%, and the Russell was down -4.5

Non-U.S. stocks also saw big declines. Developed market international stocks (as measured by the MSCI EAFE Index) fell -3.6%, while emerging market stocks (the MSCI Emerging Markets Index) were down -3.1%. The U.S. Dollar Index was up +0.6%, which presents a headwind for non-U.S. assets. In addition, inflation accelerated in the U.K., and eurozone business activity shrank. In Asia, the Bank of Japan (BoJ) kept rates unchanged at 0.25%, but consumer inflation rose to a three-month high. The Japanese Nikkei 225 Index lost -2.0% for the week. Chinese equities retreated as disappointing economic data raised concerns about their recovery.

It was another rough week for bond investors as the yield on the benchmark 10-year U.S. Treasury note rose +13 basis points for the week to finish with a yield of 4.52%. Bond prices and yields move in opposite directions and the Bloomberg U.S. Aggregate Bond Index fell -0.7% after falling -1.4% the prior week. Non-U.S. bonds, as measured by the Bloomberg Global Aggregate ex U.S. Bond Index, were down -1.1% for the week after the prior week’s -1.2% increase. 

The weeks of the Christmas and New Year’s holidays typically see low trading volume but positive action for investors in the stock market. Per Barron’s, since 1950, the S&P 500 has gained an average of +1.3% over the Christmas and New Year’s holidays.

The Week Ahead

This week will be a very quiet holiday week for economic data, with stock and bond markets closing early on Tuesday and closed entirely on Wednesday for Christmas. Most of the reports come on Monday with the Conference Board releasing its Consumer Confidence Index for December, while the Census Bureau releases the Durable Goods Report as well as New Home Sales for November. The Chicago Fed also releases its National Activity Index on Monday. The Richmond Fed releases its regional manufacturing survey results for December on Tuesday, weekly jobless claims come on Thursday, and Wholesale Inventories are reported on Friday.

Chart of the Week

The Conference Board’s Leading Economic Index (LEI) increased by +0.3% in November, the first increase since February 2022. That is up from the prior month’s unrevised -0.4% decline and above Wall Street forecasts for a -0.1% drop. The breadth of the index was solid with 7 of the 10 indicators tracked positive for the month. Building Permits were a leading contributor for the month, responsible for +0.18% of the month’s total, with Stock Prices the second largest contributor, contributing +0.10%. ISM New Orders were the biggest detractor for the fifth straight month, taking -0.11% from the monthly total. With November’s gain, the LEI no longer signals an impending recession. The LEI Coincident Index improved by +0.1% for the fifth month in a row. Meanwhile, the LEI Lagging Index rose by +0.3% after falling -0.1% the prior month.

The LEI increased in November 2024 for the first time in over 2 years

Leading and Coincident Economic Indexes (2000 – November 2024)

Did You Know?

RETURN TO OFFICE – Analyzing the effect of Return-To-Office (RTO) mandates of S&P 500 firms on employee turnover and hiring, researchers found that firms experience abnormally high employee turnover following RTO mandates. The increase in turnover was more pronounced for female employees, more senior employees, and more skilled employees. It also took these firms significantly longer to fill their job vacancies after the mandates. These results suggest that firms lose their top talent and female employees after RTO mandates. (Source: SSRN, Bespoke)

TWO YEAR STANDOUT – In October, the trailing two-year return for the S&P 500 topped +60%, one of the best two-year periods on record, ranking above the 95th percentile relative to all other periods. Following prior periods of similar two-year returns since 1930, equity market performance over the next year was below average. (Sources: Bespoke)

BETTER THAN AVERAGE – Conventional wisdom says that gridlock is good for the market as it keeps both parties in check, but prior periods of full Republican control of the three branches of government have been accompanied by better than average returns. (Bespoke)

This Week in History

SHOE BOMBER THWARTED – On December 22, 2001, Richard Reid’s terror plot was thwarted. Known as the “Shoe Bomber,” Reid was a British national who attempted to destroy American Airlines Flight 63 from Paris to Miami. Reid had explosives concealed in the soles of his shoes, planning to ignite them during the flight. However, his attempt was thwarted when passengers and crew noticed his behavior and the smell of smoke on the aircraft. They managed to subdue him before he could successfully detonate the explosives. The flight was diverted to Boston’s Logan International Airport, where Reid was arrested and pled guilty to terrorism-related charges and was sentenced to life in prison without parole. (Source: Bespoke)

Economic Review

• The final reading of the December University of Michigan Consumer Sentiment Index was unchanged at 74.0 from the preliminary reading two weeks ago, slightly lower than the 74.2 reading economists expected. That is still a fifth straight gain from the prior month’s reading of 71.8, but it remains far below the pre-pandemic peak of 101 in February 2020 and the post-pandemic high of 88.3 in April 2021. The Current Economic Conditions component slipped to 75.1 from the initial estimate of 77.7 and is up from the prior month’s 63.9. On the other hand, the Consumer Expectations component was revised up to 73.3 from the initial estimate of 71.6 but is down from 76.9 the prior month. One-year inflation expectations were +2.8%, down from the +2.9% initial estimate but up from the prior month’s level of +2.6%. The five-year inflation expectations level was +3.0%, down from the +3.1% prior estimate and +3.2% from last month.   
• Government Spending was also revised higher. On the downside, lower-income households are showing signs of financial stress, such as higher delinquent payments, and have had to rely more on debt to get by. The report also showed one of the Fed’s preferred inflation metrics — the Core Personal Consumption Expenditures Price (PCE) Index, which excluding food and energy, was also revised slightly higher to +2.2%. Overall, the stronger-than-expected economic growth and higher than expected inflation likely means fewer Fed rate cuts in 2025.  
• Homebuilder confidence was unchanged at a 7-month high of 46 in December, according to the National Association of Home Builders (NAHB) Housing Market Index (HMI), which was light of expectations for 47. A year ago, the index stood at 34. The index is based on a 0-to-100 scale, where any number over 50 indicates a good reading, and below 50 is considered negative sentiment. The Current Sales component held steady at 48, while Sales Expectations in the Next Six Months rose +3 points to 66, the highest level since April 2022.  Traffic of Prospective Buyers slipped -1 point to 31. For the month, 31% of builders reported cutting home prices, unchanged from the prior month. The average price reduction was also unchanged, at 5%. The use of sales incentives beyond price cuts was steady, too, remaining at 60%. 
• Personal Spending rose +0.4% in November, below expectations for +0.5% but up from a downwardly revised +0.3% the prior month (originally reported at +0.4%). After adjusting for inflation though, Real Personal Spending was up +0.3%, in line with expectations and up from an unrevised +0.1% the prior month. Meanwhile, Personal Income rose +0.3%, less than the expected +0.4% and down from an upwardly revised +0.7% (from +0.6%). The Personal Savings Rate slipped to +4.4 from +4.5% the prior month.
• November Building Permits, one of the leading indicators tracked by the Conference Board, rose +6.1% to 1,505,000, following the prior month’s -0.4% slip to 1,419,000 units (revised higher from -0.6%). That was much better than the expected +1.0% rise to 1,430,000 units. Single-unit permits were up +0.1%, while multi-unit permits for buildings surged +19.0%, the biggest monthly increase since February 2023. Regionally, permits were up +11.3% in the Northeast, +10.7% in the Midwest, +5.7% in the South, and +1.8% in the West. Meanwhile, Housing Starts fell -1.8% to a seasonally adjusted annual rate of 1,289,000 units, more than the expected increase of +2.6% to 1,345,000 units and down from the prior month’s positively revised 1,312,000 units, or -3.2% decline (originally 1,311,000 and -3.1%). Housing starts peaked at 1,800,000 million in April 2022. Single-family homes rose +6.4% in the month, while multi-family units plunged -24.1%. New construction starts were up +10.6% in the Northeast, down -28.2% in the Midwest, up +10.2% in the South, and down -11.9% in the West.
• The National Association of Realtors (NAR) reported that Existing Home Sales rose +4.8% in November to an eight-month high seasonally adjusted annual rate of 4.15 million units, above expectations for 4.09 million units and up from the 3.96 million units reported the prior month. Year-over-year existing sales were up +6.1%, the biggest annual gain in over three years, up from the +2.9% annual rate the prior month. The Median Existing Home Price slipped to $406,100, down from $407,200 the prior month. Year-over-year, home prices were up +4.7%. The Inventory of Homes for Sale was up +0.7% from the prior month and +19% from last year, to 1.37 million units, which is the highest level since October 2021. Unsold Inventory is at a 3.8-month supply, down from 4.2 months the prior month. Homes Listed for Sale remained on the market for 29 days on average, up from 28 days the previous month. First-Time Buyers were 30% of sales in the month, up from 27% the month before. Historically, these buyers make up closer to 40% of home sales, but affordability has been hit hard in the last two years due to fast-rising home prices and higher mortgage rates. All-Cash Sales fell to 25% of transactions from 27% the prior month. Homes sold above list price were 18%, down slightly from 19% a month ago. For the month, sales rose in three of the four regions: the Northeast was up +8.5%, the South was up +5.6%, the West was flat at +0.0%, and the Midwest was up +5.3%.
• U.S. Industrial Production fell -0.1% in November, an improvement from the -0.4% drop the prior month (though revised lower from -0.3%) but far below expectations for a +0.3% increase. It is the third straight month of declines. Manufacturing output was up a disappointing +0.2% versus the +0.5% expected by Wall Street. Manufacturing represents about three-quarters of total Industrial Production and has struggled from limited capital spending as a result of high borrowing costs.  Capacity Utilization also disappointed, falling to 76.8%, the lowest level since April 2021, below expectations to come in at 77.3%. Capacity Utilization reflects how much a manufacturing plant is being used to produce things.
• The New York Fed’s Empire State Manufacturing Index, a gauge of manufacturing activity in the state, fell -31 points in December to +0.2, far below expectations for a retreat to 10.0. New Orders and Shipments both retreated but remained positive. New Orders fell to +6.1 from +28.0, which was its highest level since November 2021, while Shipments fell +9.4 from +35.2, which was its highest level since April 2022. The index for Business Conditions Expected in Six Months fell to +24.6 from +33.2. Labor market conditions worsened somewhat as the index for Number of Employees moved down to -5.8 from +0.9, and the Average Employee Workweek index fell to -3.9 from +6.1. On the positive side, the inflation components eased, with the Prices Paid indicator slipping -6.7 point to +21.1, its lowest level since July 2023, and the Prices Received indicator falling -8.2 points to +4.2, its lowest level in a year.
• Manufacturing in the Federal Reserve’s Third District tumbled to -16.4 in December from -5.5 the prior month, according to the Philly Fed Manufacturing Business Outlook Survey. That was far below expectations for +2.8 (readings above zero indicates economic expansion) and just the third negative reading of the year. The indexes for New Orders and Shipments both declined and turned negative. New Orders fell -13 points to -4.3, the lowest level since May. The Shipments component fell -6 points to -1.9. The Employment index edged down from +8.6 to +6.6 this month. The Six-Month Business Outlook dropped to +30.7 after hitting +56.6 the prior month. The Prices Paid index moved up 5 points to 31.2, while the Prices Received index fell 7 points to +7.3.
• Weekly MBA Mortgage Applications fell -0.7% for the week ended December 13, following the prior week’s +5.4% gain. The Purchase Index was improved +1.4% following a -4.1% rise the prior week. The Refinance Index slipped -2.6%, following the prior week’s +27.2% surge. The average 30-year Mortgage Rate rose to 6.75% from 6.67% the prior week.
• Weekly Initial Jobless Claims fell -22,000 to 220,000 for the week ended December 14, better than expectations for 230,000. The prior week was unrevised. The number of people already collecting unemployment claims (i.e., Continuing Claims) fell -5,000 to 1,874,000 in the week ended Dec 7, less than expectations of 1,892,000. Last week’s reading of 1,886,000 was revised lower to 1,879,000.

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.