Weekly Market Update – December 27, 2024

Quick Takes

• A fall in shares of big tech companies dragged U.S. stocks lower on Friday, but the major U.S. stock indices still held onto gains for the week. The S&P 500 closed the week with a +0.7% gain, the Nasdaq Composite was down -0.8%, and the Russell 2000 lost -1.8%.
• Non-U.S. stocks outperformed U.S. stocks, with the MSCI EAFE Index (developed market international stocks) up +1.8% while the MSCI Emerging Markets Index was up +1.0%. Those gains came despite the U.S. Dollar Index rising for +0.4%, the fourth straight week higher.
• The yield on the 10-year and 30-year U.S. Treasury notes rose to their highest levels since May and April, respectively. Both the 10-year and 30-year UST yields rose +10 basis points for the week, with the 10-year closing the week at 4.63% and the 30-year at 4.82%.

Source: Bloomberg. Data as of December 27, 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.

Santa Claus Rally Stumbled a bit, Bonds humbled a bit

A fall in shares of big tech companies dragged U.S. stocks lower on Friday, but the major U.S. stock indices still held onto gains for the week. Low trading volumes, with the Christmas and Hanukkah holidays falling during the week, made defining the action during the week a challenge. Markets had decent gains on Monday and Tuesday, closed early on Tuesday and stayed closed on Wednesday for Christmas observation, and were essentially flat on Thursday but then fell about -1 to -1.5% on Friday. Most stocks struggled Friday, but semiconductor stocks and mega-cap Tech stocks were hit particularly hard. There wasn’t any specific news or earnings reports that caused the sell off, with most market watchers chalking it up to year-end profit-taking by institutional investors, continued pressure from last week’s hawkish Federal Reserve outlook, and/or the persistent rise in bond yields. In the end, the S&P 500 Index closed the final full week of 2024 with a +0.7% gain, the tech-heavy Nasdaq Composite Index was down -0.8%, and the small cap Russell 2000 Index lost -1.8%. Tuesday’s session marked the start of the so-called Santa Claus Rally (SCR) window—the seven-trading-day period that ends with the second trading day of a new year. So far, the SCR has been mixed for the major indexes. Friday’s drop gave back most (for the small caps Russell) to all (for the S&P 500 and Nasdaq) of their Santa period rally since Tuesday’s open. 

Not helping was the continued creep higher for longer duration bond yields. The yield on the 10-year and 30-year U.S. Treasury notes rose to their highest levels since May and April, respectively. Both the 10-year and 30-year UST yields rose +10 basis points for the week, with the 10-year closing the week at 4.63% and the 30-year at 4.82%. Bond prices and yields move in opposite directions and the Bloomberg U.S. Aggregate Bond Index fell -0.3% after falling -0.7% the prior week. Non-U.S. bonds, as measured by the Bloomberg Global Aggregate ex U.S. Bond Index, were down -0.4% for the week after the prior week’s -1.1% drop.

Non-U.S. stocks performed better than U.S. stocks, with developed market international stocks (as measured by the MSCI EAFE Index) up +1.8% while emerging market stocks (the MSCI Emerging Markets Index) were up +1.0%. Those gains came despite the U.S. Dollar Index rising for +0.4%, the fourth consecutive week higher.

The Week Ahead

It will be another holiday-shortened week with a relatively quiet economic calendar. Housing data is prevalent with Pending Home Sales on Monday, the S&P Core Logic and FHFA home price indices on Tuesday, and weekly mortgage applications on Thursday (because the market is closed for New Year’s Day on Wednesday). S&P Global and ISM report their U.S. manufacturing Purchase Managers Indices (PMIs) on Thursday and Friday, respectively.

Chart of the Week

The Conference Board’s Consumer Confidence Index retreated to 104.7 in December, down from 112.8 the prior month (revised up from 111.7), which was the highest level in 16 months. It was far below Wall Street expectations for an increase to 113.2. A post-election pop in confidence fizzled at the end of the year primarily due to ideological divides pertaining to forward expectations. The Present Situation gauge slipped a bit to 140.2 from 141.4 (revised up from 140.9). However, the Expectations gauge — which reflects consumers’ six-month outlook — dropped to 81.1 from 93.7 (revised up from 92.3), the highest level since December 2021, in a sign of renewed optimism. Levels below 80 on the expectations index often signal a recession within the next year. In good times, the index can top 120 or more. In write-in responses to the survey, consumers increasingly cited politics and tariffs, with a special question showing that 46% of respondents expected tariffs to raise the cost of living, while 21% expected tariffs to create more US jobs. New England and mountain regions saw confidence collapse, while the middle of the country saw confidence surge. Drilling down further shows Democrat-dominant states like New York and California saw consumer expectations plunge, while Republican-heavy states like Texas saw expectations soar (as did Pennsylvania). Good news was found in inflation expectations for the year ahead, which were shown to rise at the slowest pace since 2020. Also, more Americans expect to buy big-ticket items, including cars, in the next six months.

Confidence Dented by Tariff Concerns and Democrat Expectations

Contrasting Consumer Confidence, PA & TX versus CA & NY

Source: Bloomberg, ZeroHedge.

Did You Know?

NETFLIX SCORES – More than 24 million viewers logged into Netflix during each of the Christmas Day NFL games, a streaming record for pro football. The second match, in which the Ravens trounced the Texans 31-2, peaked at 27 million viewers during Beyoncé’s halftime show. (Source: Bloomberg)

MEXICAN STANDOFF – The share of all vehicles priced below $30,000 and sold in the U.S. that are built in Mexico stands at 31.6%, according to car-shopping website Edmunds. Costs related to Trump’s proposed 25% tariffs on Mexican imports would likely be passed along to the consumer and hit the most affordable cars and SUVs the hardest, analysts and dealers say. (Sources: The Wall Street Journal)

DEPUTY DOGE – Elon Musk’s deputy, Steve Davis, has spent more than 20 years helping the billionaire cut costs at businesses such as SpaceX, the Boring Company and Twitter—now he’s helping recruit staff for the Department of Government Efficiency, or DOGE for short. They’ve hired about 10 people so far, including software engineers with experience in artificial intelligence. Despite its moniker, DOGE is not an official government agency established under law by Congress, and its authority is still taking shape. (Bloomberg)

This Week in History

CHRISTMAS EVE BABY – On December 24, 1905, aviator, Hollywood mogul, and business magnate Howard Hughes was born in Texas. He inherited family wealth and became richer yet from his varied businesses before retreating from public view and dying in 1976 with no will or children. (Source: The Wall Street Journal)

Economic Review

• The Commerce Department reported Durable Goods Orders for long-lasting items such as televisions, appliances and transportation equipment fell -1.1% in November, below the -0.3% expected. That follows a -0.5% slide the prior month (revised down from the initial -0.4% dip). It’s the third decline in the last four months and was largely driven by automobiles and planes. Durable Goods Orders, Excluding Transportation, were down a more modest -0.1%, still below expectations of +0.3% and down from an unrevised +0.2% the prior month. On the positive side, the important Core Capital Goods Orders (capital goods excluding volatile sectors like transportation and defense), a proxy for business spending, rose +0.7% from -0.1% dip the prior month (revised up from -0.2%), beating expectations for a +0.1% increase. That was the biggest gain in 15 months. Core Capital Goods Shipments, which are factored into GDP, rose +0.5%, beating expectations for a +0.2% increase and up from +0.4% the month before (revised higher from +0.3%). Orders for new automobiles and planes declined slightly in November to drag the headline number down, while orders rose for machinery, computers and electrical equipment. Over the past 12 months, durable goods orders have fallen -5.2%. The durables category comprises products meant to last at least three years that tend to require a bigger financial commitment from buyers.
• The Federal Reserve Bank of Chicago reported that U.S. economic activity improved in November but remains below trend, as the Chicago Fed National Activity Index (CFNAI) rose to -0.12 from -0.50 the prior month (which was revised lower from the originally reported -0.40). That is slightly better than expectations for a -0.15 reading but far below the recent February high of +0.35. Readings below zero indicate below-trend growth in the national economic activity. The CFNAAI three-month moving average fell to -0.31 from -0.27 the month before but remains well off the low of -0.35 in December 2022. During the last 20 years, there has been a 91% correlation between the three-month index level and the quarterly change in real GDP. Three of the four broad categories of indicators used to construct the index improved from the prior month, but all four remain below trend (negative). The Personal Consumption and Housing category contributed -0.02, unchanged from the prior month. The Production and Income category contributed -0.08, up from -0.31 the prior month. The Employment, Unemployment, and Hours category contributed -0.01, up from -0.09 the prior month. The Sales, Orders, and Inventories category contribution was -0.02, up from -0.08 the prior month. Overall breadth of the index was poor with only 36 of the 85 individual indicators making positive contributions, a slight improvement from just 33 the prior month. However, improvement was broad-based with 45 indicators improving sequentially while 29 deteriorated and 1 was unchanged.
• The Commerce Department reported New Home Sales jumped +5.9% in November to a rate of 664,000 units after the prior month’s -14.8% plunge (of 627,000 units annual rate). That was still short of expectations for a +9.7% increase to a 669,000 unit annual rate and was dragged down by a big drop in demand in the South, which still reflects the effects of hurricanes Helen and Milton. New Home Sales data tend to be volatile month-on-month and are often revised. New-home sales remain far below the recent peak of over 1 million units in August 2020. Year-over-year, sales of new homes were up +8.4% compared to -6.8% the prior month. By region, month-over-month sales were down -41.0% in the Northeast and -7.5% in the West, while up +17.3% in the Midwest and +13.9% in the South. The Median New Home Price fell -6.3% year-over-year to $402,600 from $425,600 the prior month. The months of supply at the current rate of sales was 8.9, down from 9.2 the prior month.
• The Richmond Fed Manufacturing Index improved but remains soft, coming in at -10 in December from -14 in the prior month, right in line with expectations. All three component indexes improved but remain in contraction territory. The Shipments component ticked up to -11 from -12 the prior month. The New Orders index rose to -11 from -19. The Employment index improved to -8 from -10. The future indexes for shipments and new orders also increased further into positive territory, suggesting that many firms expected improvements in the next six months.
• According to the U.S. Bureau of Economic Analysis, the advance U.S. Trade Deficit widened another 5% in November to $102.9 billion, near its all-time high. That is up from a 30-month high of -$84.4 billion the prior month, September from -$70.8 billion the prior month, and ahead of Wall Street expectations for -$101.2 billion. Smaller trade deficits help contribute to economic growth, while larger deficits inhibit growth. Imports were the primary contributor to the wider deficit as businesses rushed to bring in imported goods ahead of the holiday shopping season. Imports rose +4.5% to $279.2 billion from $267.2 billion the prior month. Exports rose +4.4% to $176.4 billion from $170.0 billion the prior month. 
• Weekly Initial Jobless Claims fell -1,000 to 219,000 for the week ending December 21, better than expectations for 223,000. The prior week was unrevised. The number of people already collecting unemployment claims (i.e., Continuing Claims) increased +46,000 to 1,910,000 in the week ending December 14, more than expectations of 1,881,000 and the highest level in more than three years. Last week’s reading of 1,874,000 was revised lower to 1,864,000.

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.