12/16/2024 Market Strategy
Where Are We Now?
Last Week’s Mixed Market Performance Suggests Investors Are Biding Their Time, Looking for Catalysts to Move the Markets from Here.
Key Takeaways
- We expect the Fed to cut rates by another 25 basis points at its meeting on Wednesday of this week. The futures market has priced in the probability of a cut at over 90%.
- We also believe that the three rate cuts that are the consensus view for 2025 seem reasonable provided that inflation continues to moderate in the New Year.
- Last week’s inflation reports showed consumer and producer prices sticky in November as further reduction in the inflation rate towards the Fed’s 2% target remains elusive.
- This week brings data on November retail sales as well as another inflation report—the PCE deflator, the Fed’s preferred measure.
- Our expectation remains for a Santa Claus rally in equities based on the overall progress of monetary policy and economic resilience.
After the powerful broad-based rallies in US stocks from the summer’s Aug. 8 low and equity market activity since Nov. 5 (Election Day), some investors ponder whether the bull market is nearing exhaustion or simply taking opportunity to take pause to ponder what catalyst comes next before resuming its upward trajectory.
Last week’s action in the equity market looked to us more like some market churn taking place as market participants curbed their recent enthusiasm to ponder what comes next as market activity moves towards year-end and anticipation of what lies ahead in the new-year takes hold.
The Dow Jones Industrials, the S&P 500, the S&P 400 (mid-caps), the S&P 600 (small-caps) and the Russell 2000 (small-caps) respectively moved 1.78%, 0.61%, 1.63%, 1.46% and 2.55% lower in the week ended last Friday. The NASDAQ Composite (over 40% weighted in tech and tech related stocks) moved in the opposite direction to edge 0.34% higher.
Some profit taking against losses, rebalancing and rotational moves would appear to us to have provided some trimming of stock prices but not taken as much as a haircut considering how far stocks have run up this year.
The CPI and the PPI data released last week should serve to remind investors that for all the progress the Federal Reserve has made in curbing the pace of stateside inflation from around 9% in March of 2022, the Fed’s 2% inflation target remains elusive.
Inflation stickiness
When it comes to a process of putting inflation in check we can’t help but recall the adage “It ain’t over ‘til it’s over”. Historical reference reminds us that it’s seldom if ever easy to put inflation in check after a period in which it has reached levels high enough to become a big enough problem to capture the attention of business, consumers, and monetary policy officials.
The bad news is that it takes time to put inflation in check. The good news is that history suggests it is an attainable goal so long as the Fed remains vigilant and that such vigilance if sensitively applied does not require a recession to produce the desired outcome.
While the dual mandate of the Federal Reserve is simple in design it is seldom readily achieved nor is it devoid of complexities and challenges that require more than a few months to overcome.
Third quarter S&P 500 revenue and earnings growth continued to show resilience in the latest earning season as has much of the data released this year pertaining to the consumer and the jobs market that suggest to us that improved fundamentals rather than irrational exuberance has placed equity benchmarks at the levels they have reached this year.
We find it quite natural for some slowing to be felt after the Fed’s hike cycle raised rates eleven times and paused nine times from March of 2022 before officials started to cut rates in September and November. Expectations for a third modest rate cut in December appears to us likely to be realized with the Fed remaining sensitive to its dual mandate for economic growth and full employment (that is with the unemployment rate in a range between say 3% to 4%).
We look for the Fed to cut 25bps at its meeting this week. The consensus outlook for three additional cuts in 2025 looks to us realistic as well considering the Fed Chair repeatedly having said that the Fed’s stance is one that remains supportive of an approach not singularly focused on bringing inflation down but mindful of the importance of keeping employment at levels that reflect what has long been considered full employment.
Our 2025 target for the S&P 500 of 7100 with earnings projected at $275 calls for upside in price for the S&P 500 of 17.3% from where the market closed last Friday Dec. 13 (6051.09) and 14.5% from our recent upwardly revised 2024 year-end target of 6200. We’re looking for S&P 500 earnings to grow 10% in 2025 from our $250 projection for this year (2024).
Widely held investor expectation that the progrowth, pro-business stance of the incoming Trump Administration in Washington could provide further support for the economy and could add to the case for stocks climbing the proverbial “wall of worry” into and through 2025.
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