Weekly Market Update – January 3, 2025

Quick Takes

• Stocks had a Scrooge-like performance during the “Santa Claus Rally,” which is the seven-day period that ended Friday. This year’s Santa rally disappointed with a -0.5% decline for the S&P 500 Index versus the historical average gain of +1.3%.
• For the New Year’s holiday-shortened week, the S&P 500 and Nasdaq Composite both ended down -0.5% as investors took some money off the table following 2024’s hefty gains. However, the small-cap Russell 2000 rose +1.1% after trailing large caps the past few weeks.
• U.S. Treasuries advanced as yields fell across most maturities. U.S. investment-grade bonds and high-yield bonds also advanced in low trading volume. The Bloomberg U.S. Aggregate Bond Index inched up +0.2%, but non-U.S. bonds (the Bloomberg Global Aggregate ex U.S. Bond Index) fell -0.6% for the week.

Source: Bloomberg. Data as of January 3, 2025.
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 staggered into the New Year, Bonds up slightly

Stocks had a Scrooge-like performance during the “Santa Claus Rally,” which is the seven-day period that ended Friday. This year’s Santa rally disappointed with a -0.5% decline for the S&P 500 Index versus the historical average gain of +1.3%. For the New Year’s holiday-shortened week, the S&P 500 ended lower, too, falling -0.5% as investors took some money off the table following 2024’s hefty gains. Tuesday marked the final trading day of 2024, with markets closed for the New Year’s Day holiday on Wednesday. Wall Street seemed a bit hungover for the first trading day of 2025 on Thursday, with most major indexes ending lower to kick off the new year. Markets finally caught a bid on Friday as the major stock indexes gained +1% or more. For the S&P, Friday’s +1.3% gain broke a five-session slump and was its best one-day performance since November 6, the day after the presidential election. For the week, the Nasdaq Composite also shed -0.5%. Small-cap stocks bucked the trend, with the Russell 2000 Index gaining +1.1% for the week, but it had trailed large caps the prior few weeks.

Non-U.S. stocks also struggled with developed market international stocks (as measured by the MSCI EAFE Index) and emerging market stocks (the MSCI Emerging Markets Index) were both down 0.9%. U.K. stocks were the only major European market to see gains as Germany, France, and Italy all declined. In Asia, Japan fell as well as did Chinese stocks. 

In the bond world, U.S. Treasuries advanced as yields fell across most maturities (bond prices and yields move in opposite directions). U.S. investment-grade corporate bonds posted positive returns in light trading. The high-yield bond market also advanced in low trading volume despite the weakness in stocks. The Bloomberg U.S. Aggregate Bond Index inched up +0.2% after falling -0.3% the prior week. However, non-U.S. bonds, as measured by the Bloomberg Global Aggregate ex U.S. Bond Index, were down -0.6% for the week, after the prior week’s -0.4% drop.

The Week Ahead

Next week brings a third-consecutive shortened-trading week, with the stock market closed on Thursday, January 9, for a National Day of Mourning for former President Jimmy Carter, who passed away December 29. The calendar is a bit busier than the prior two weeks, though. The highlight of the week will come on Friday with the December Employment Situation Report; Wall Street is expecting 160,000 new nonfarm payrolls and the unemployment rate to remain at 4.2%. Other data to watch next week include the Institute for Supply Management’s (ISM) Services Purchasing Managers’ Index (PMI), which will be released on Tuesday (the lesser followed S&P Global U.S. Services PMI Index is reported Monday). The FOMC releases the minutes from its mid-December monetary-policy meeting on Wednesday. 

Other notable activity includes a trickle of fourth quarter earnings reports on Friday from S&P 500 members Constellation Brands, Delta Airlines, and Walgreens Boots Alliance. Earnings season begins in earnest when several of the big banks report on January 15. Also on Friday, the Supreme Court will hear arguments in the highly anticipated TikTok ban case.

Chart of the Week

The Institute for Supply Management’s (ISM) Manufacturing PMI improved to a nine-month high of 49.3%, compared to November’s unrevised 48.4%, but remained in contraction (below the 50.0%) for the 9th consecutive month and for 25 of the last 26 months. The improvement was driven by a climb in New Orders, an indication of future demand, which rose +2.1 points to 52.5%. As shown in the chart below, December was the highest level since January 2024, which was also 52.5%, and for a higher level, one has to go back to May 2022. The Production barometer jumped +3.5 points to 50.3%, its highest level since April. However, the Employment gauge fell -2.8 points to 45.3%, a particularly negative signal. The Price Paid index, a measure of inflation, rose +2.2 points to 52.5%. “U.S. manufacturing activity contracted again in December, but at a slower rate compared to November,” said Timothy Fiore, chair of the survey. “Demand showed signs of improving.”

New Orders rise to best level since January, May 2022 was next best

ISM Manufacturing New Orders

Source: Institute for Supply Management.

Did You Know?

FINALLY, A BOUNCE – After ending 2024 on a four-day losing streak, the S&P 500 extended it to five straight down days on the first trading day of 2025. Wall Street was due for a bounce and finally got one on Friday, January 3, as the S&P 500 rallied +1.2% to close out the week. (Source: Bespoke Investment Group)

TESLA DELIVERIES DROP – Annual vehicle deliveries by Tesla in 2024 fell to 1.79 million, the first decline from a previous year in more than a decade. A surge of promotional deals in the fourth quarter failed to prevent a -1% drop from 2023’s tally. The electric vehicle maker fell short of the roughly 515,000 vehicles needed in the fourth quarter to top the prior-year results. (The Wall Street Journal)

FEAR ZONE – The CNN Fear and Greed Index recently moved firmly into the “Fear” zone and was briefly even in the “Extreme Fear” zone back in late December. The recent market dip has taken sentiment to its most negative level since the early August global market pullback. While investors got giddy in the immediate aftermath of the November election, they still seem to quickly scatter any time risk assets experience any kind of routine pullback. (Sources: CNN Business, Bespoke Investment Group)

This Week in History

SURPRISE RATE CUT – On January 3, 2001, the Federal Reserve made a surprise rate cut from 6.5% to 6%, and Wall Street went nuts. Analysts who previously said that interest rates were irrelevant to the value of tech stocks embraced the cut, and the Nasdaq Composite Index rocketed to its best day ever, gaining +14%.  It is “unambiguously great news” for investors, said Edward Keon of Prudential Securities. The index went on to plunge -53% by November 21 as the dot com bubble burst, but recovered some of the losses to finish 2001 down -21%. (Source: The Wall Street Journal)

Economic Review

• The final S&P Global U.S. Manufacturing Purchasing Managers Index (PMI) improved in December but remained in contraction territory, rising to 49.4 from a 48.3 preliminary ‘flash’ estimate two weeks ago, but down from the prior month’s 49.7 reading (levels above 50 indicate economic expansion, while levels below 50 indicate contraction). Manufacturing production was down for the fifth successive month, with the rate of contraction the fastest in a year and a half. S&P attributed the weakness to a pullback in New Orders along with scaled-back plans for Purchasing and Inventory. Firms increased Employment, however, as positive expectations for the coming year encouraged manufacturers to increase staffing levels for the second month running. Meanwhile, the rate of Input Cost inflation accelerated sharply to the fastest since August. Firms increased their Output Prices, with the pace of inflation quickening to a three-month high. 
• The National Association of Realtors (NAR) reported that Pending Home Sales rose for the fourth straight month in November, up +2.0% compared to last month’s +1.8% increase and far ahead of Wall Street expectations for a +0.8% rise. That puts the index at a level of 79, the highest it’s been since February 2023. Year-over-year sales were up +5.6%, below the +7.9% expected and down from the +6.5% annual pace the prior month (revised lower from +6.6%). From a regional perspective, three of four regions rose from the prior month but two were at a slower rate. The South led with a +5.2% increase, up from +0.7% the prior month. The Midwest and West were up only marginally at +0.4% and +0.5% respectively. The Northeast was the sole decliner, down -1.3% versus +4.7% the prior month. “Consumers appeared to have recalibrated expectations regarding mortgage rates and are taking advantage of more available inventory,” Lawrence Yun, chief economist at the NAR, said in a statement. 
• According to the Case-Shiller S&P CoreLogic 20-City Home Price Index, the pace of U.S. housing prices quickened in October and marked 21 straight monthly increases and a new record high price level. Home prices in the 20 biggest U.S. metropolitan areas increased a seasonally adjusted +0.32%, above expectations for a +0.20 increase and down from a +0.22% increase the prior month (revised up from +0.18%). On a year-over-year (YoY) basis, the 20-city index was up +4.22%, just above expectations for +4.10% and down from the prior month’s +4.61% annual pace (revised higher from +4.57%). That’s the slowest annual price appreciation since September 2023. New York remained in the top spot over Chicago with the biggest year-over-year home-price gains (up +7.3% and +6.2%, respectively). Tampa and Denver remain at the bottom of the list of annual gains (at +0.39% and +0.44% annual rates, respectively). All 20 cities registered annual increases for the 11th consecutive month.
• The competing Federal Housing Finance Agency (FHFA) House Price Index (HPI) also showed U.S. home prices move up in October, as the government agency reported prices rising +0.4% after moving up +0.7% the prior month (unrevised). It was the 5th month of increases. The government data showed home prices up +4.2% year-over-year compared to +4.6% the prior month. House prices were up YoY in all nine regions, with the highest rate in the Middle Atlantic (+7.0%). “The slow but continued house price growth and the effect of locked-in interest rates led to persistent housing affordability challenges,” said Dr. Anju Vajja, Deputy Director for FHFA’s Division of Research and Statistics.
• The Chicago Purchasing Managers Index (PMI), a barometer for the Chicago region’s business and manufacturing conditions (also known as the Chicago Business Barometer), slipped to 36.9 in November from an unrevised 40.2 the prior month. That was far below expectations for a 43.0 reading. Readings below the 50 level indicate contraction. This is the 3rd consecutive monthly decline, the 12th consecutive reading in contraction territory, and the lowest level for the index since May 2024. The decline was primarily driven by a fall in New Orders, which fell -13.5 points to the second lowest level since May 2020. Production also cooled, falling -2.9 points, its 4th successive monthly decline to its lowest level since January 2009, excluding the April-May 2020 pandemic drop. On the bright side, Employment advanced +11.9 points to the highest level since November 2023. Prices Paid eased, softening -5.8 points to the lowest level since July 2024.
• The Texas Manufacturing Outlook Survey showed Texas factory activity improved in December, with the General Business Activity index rising to +3.4 from an unrevised -2.7 the prior month, handily beating expectations for a -3.0 reading. That breaks a 31 consecutive month streak of contractionary (negative) readings dating back to May 2022. Underlying details showed strength, with 9 of the 14 Facilities and Products indicators improving for the month. The Production index, a key measure of state manufacturing conditions, rose to +3.9 from -0.9 last month. The New Orders index shot up +11 points to -0.9, suggesting demand was relatively unchanged from the prior month. The Company Outlook index was positive for the second consecutive month, increasing slightly to +8.0, while the Outlook Uncertainty index fell five points to +1.2.  Labor market measures suggested Employment and Hours Worked mostly held steady during the month. Inflation pressures eased but remain elevated, with Wages and Benefits at +17.7, down from +18.6, and Prices Paid for Raw Materials falling to +10.5, down from +28.5 the previous month and the lowest reading in 17 months.   
• Weekly MBA Mortgage Applications fell -10.7% and -12.6% for the weeks ending December 20 and 27, respectively (both reports delayed until Jan 2 due to the Christmas and New Year’s holidays) following a -0.7% dip the week of Dec 13. The Purchase Index was down -6.7% for each of the last two weeks following a +1.4% rise the week of Dec 13. The Refinance Index fell -16.4% and -23.4% the last two weeks following the prior week’s -2.6% decline. The average 30-Year Mortgage Rate rose to 6.97% from 6.89% the prior week.
• Weekly Initial Jobless Claims fell -9,000 to 211,000 for the week ending December 28, better than expectations for 221,000. The prior week was revised higher by 1,000. The number of people already collecting unemployment claims (i.e., Continuing Claims) fell +52,000 to 1,844,000 in the week ending Dec 21, better than expectations of 1,890,000. Last week’s reading of 1,910,000 was revised lower to 1,896,000.

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.