JANUARY 2025 MARKET UPDATE
January Update:
Fed vs. inflation
I hope you have had a wonderful start to the new year. Major U.S. equity indexes closed out the final month of 2024 in a mixed fashion, with megacap tech being the bright spot and industrials heading lower. With so much happening courtesy of the Fed’s change in tone, it is the perfect time to update you on the final month of 2024 as we begin the new year.
No Santa Claus Rally
in December Santa Claus did not show up in rally mode at the end of December. We saw some quarter-end and year-end book squaring on the last couple of trading days of the month. Technically speaking, Santa had the first two trading sessions of the New Year as part of the Santa Claus Rally phenomenon, so Santa was a mixed bag during the holiday season this time around. Chatter and growth surrounding continued advancement in AI and now quantum computing dominate many growth-oriented conversations. For December, the S&P 500 decreased by 2.50%, the Nasdaq 100 reached an all-time monthly closing high, settling higher by 0.39%, and the Dow Jones Industrial Average fell by 5.27%. The Dow experienced a historic 10-day losing streak, the longest since 1978. Will investors buy such a dip heading into the new year?
Stocks: Strong Year, Weak Month
It has been a wonderful two-year stretch in major U.S. stock indexes. In fact, the S&P 500 just delivered the best two-year stretch since 1998. The key is staying invested! Through all the headlines, the interest rate cycling, elections, etc., long-term investors came out on top again. It seems that some tariff concerns, interest rate uncertainty, jobs uncertainty, and a Fed seemingly slowing its rate cut campaign caught up to market sentiment a bit — and that only makes sense. After all, markets do not go up in a straight line (last two years aside!). Pullbacks are often viewed as healthy in bull markets. Will we get a meaningful one anytime soon? It is expected that AI will continue to garner attention heading into 2025, with several recent deals making headlines.
Rising Bond Yields
Generally, bonds were good to investors for much of 2024, but December changed that tune quickly with rising yields. Remember, yields have an inverse relationship with bonds. With inflation being deemed stubborn and quite sticky on the consumer level, 10-year note yields responded in a big way in December, tacking on nearly 39.5 basis points and settling December near the 4.573% level. So, it’s bye-bye low 4s for now, with uncertainty over future economic policy and a Fed with a more hawkish stance (or at least less dovish) heading into 2025. With 5% being the cycle high so far after the Fed hikes in 2023, some may be asking if it is a good time to buy bonds. Well, that depends on many factors, like time horizon and type of bond, amid an uncertain outlook regarding inflation and interest rates in a new presidential administration. Here’s why one analyst says it’s not time to give up on bonds. Of course, it’s important to remember that bonds are an important part of any well-diversified portfolio, even after an era of ultra-low interest rates.
Payrolls
Market participants were looking for a perfect number leading up to December’s significant jobs report, and they got what they wanted! The data was released before the December Federal Reserve meeting, however, where the Fed’s tone shifted regarding the direction of future monetary policy. The jobs data released in December was deemed as Goldilocks-like, revealing an increase of 227,000 jobs, which exceeded the Dow Jones consensus estimate of 214,000. In addition, the October jobs figure was revised upward by 36,000 following a disappointing performance the previous month. The data was interpreted as “just right” upon the release — neither too hot nor too cold, offering encouraging news for those anticipating a December Fed rate cut.
Recent job opportunities have seen notable increases in the health care, social assistance, and leisure/hospitality sectors. Many are optimistic about the current labor market, which indicates economic growth without the risk of overheating. This type of scenario keeps the door open for potential future rate cuts by the Fed in the near term, although it looks like fewer rate cuts in 2025 than previously thought. The U.S. unemployment rate ticked up to 4.2% in December in line with expectations.
Consumer Inflation Increase:
Well, the final phase of tackling inflation is taking longer than many would hope to see.
- Consumer Price Index (CPI) data for November showed a monthly increase of 0.3%, raising the annual rate to 2.7%, up from 2.6%. Sectors like housing and services continue to drive inflation metrics higher, though shelter prices may be stabilizing. Despite CPI and Producer Price Index (PPI) remaining above the Fed’s 2% target, market reactions were optimistic, suggesting an increased likelihood of a rate cut in December, and the Fed delivered on that optimism. Core CPI, which excludes food and energy, rose by 3.3% year-over-year and 0.3% month-over-month.
- Market Reaction: Major U.S. equity indexes reacted positively to the consumer inflation data upon release, but by week’s end, results were mixed, with the Fed signaling a shifting tone on interest rates for 2025. The Dow Jones and S&P 500 declined, while the Nasdaq 100 gained on the week of the CPI data release. Sentiment has been tempered somewhat since, and PPI data warranted additional caution.
- Producer Pricing Hot: After a mostly in-line CPI report raised expectations for a December rate cut, the December PPI data release revealed stronger-than-expected wholesale prices. The monthly increase was 0.4%, exceeding the Dow Jones estimate of 0.2%, while annual wholesale prices rose by 3.0%. This uptick in prices was driven largely by food, with significant gains in pricing.
Fed Tone Pivot & Interest Rate Expectations
The Fed cut the benchmark overnight lending rate at its December meeting by 0.25% (25 basis points), bringing the target rate to 4.25%-4.50%, meeting market expectations. The move came after a 50-basis-point cut in September and a 25-basis-point cut in November. However, the Fed indicated that it is looking at two interest rate cuts in 2025 versus the four that it had projected at the September meeting. This shift to a potentially less-dovish Fed created a surge in volatility across financial markets, but it was rather short-lived as of the time of writing.
Fed Versus Inflation (Still!)
As January began, the feeling across markets was that we saw some year-end short-term profit-taking and book squaring across many assets. Markets could be overdue for a pullback after this recent runup. This could create opportunities for investors with cash on the sidelines. Quantum computing and AI will continue to garner investor attention. Since market timing is so difficult to achieve, we will continue to stick to the plan of periodic investing across diversified portfolios that has worked so well over the last couple of years.
Keeping you informed is a top priority, and as more developments occur, we will keep you apprised of them. And of course, if your New Year’s resolution is financially based or if there is anything I can help you with, don’t hesitate to get in touch with me. I am always here as a resource for you!
Financial Advisor
HH Financial Planning Group
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The S&P 500 Index is a market-capitalization-weighted index of 500 leading publicly traded companies in the U.S. The Nasdaq 100 Index is a basket of the 100 largest, most actively traded U.S. companies listed on the Nasdaq stock exchange. The index includes companies from various industries except for the financial industry, like commercial and investment banks. The Dow Jones Industrial Average (DJIA) is a price-weighted index composed of 30 widely traded blue-chip U.S. common stocks. The Russel 2000 Index is a stock market index that measures the performance of the 2,000 smaler companies included in the Russel 3000 Index. Citations: Acton, M. & Kinder, T. (2024, December). Nvidia invested $1bn in AI deals in 2024.Retrieved from https://www.ft.com/content/f8acce90-9c4d-4433-b189-e79cad29f74e Adinolfi, J. (2024, December). The ‘BATMMAAN’ stocks swooped to the market’s rescue in December. 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