Weekly Economic Update: December 17, 2024

Nasdaq closes above 20,000

As we forecasted a few weeks ago in this commentary, the Nasdaq closed above 20,000 points before year-end, driven primarily by Big Tech.¹ Still, last week was mostly weak as we were down four out of five days. Despite those down days, the market was relatively flat because the one day of the week when we were up (Wednesday) was pretty solid. The S&P 500 nearly set another record that day just as the Nasdaq broke 20,000. But the Dow has faded a bit after hitting 45,000 in early December.^2,3

Markets seem to have slowed their torrid pace from just after the election. Is this the start of something or just a pause before we resume an upward push? After three of the benchmark indexes set significant new milestones (S&P 500 6,000, Dow 45,000 and Nasdaq 20,000), it looks like the markets may be pausing as we wind down 2024.

The final major event of the year before markets effectively shut down for the holidays will be the Federal Reserve meeting this Tuesday and Wednesday. Expectations are for another 25-basis-point (0.25%) cut.⁴ After a brisk post-election run-up with markets close to all-time highs, markets will again begin to speculate when and how much the Fed will cut again. They’ll also start analyzing the potential impact of new policies from the incoming administration.

I know it’s tempting to check out and watch all the stories about rogue drones, but after a really strong year the dawn of a new one is a really good opportunity to review your allocations and portfolio positioning. Reconfirm your risk tolerance and make sure your goals are still the same and on track. We’re excited for the new year, but it’s good to remain grounded and mindful that the markets can surprise us in unexpected ways.

Inflation stays stuck but the Fed is still on track for one more cut

Inflation isn’t improving. The Consumer Price Index (CPI) came in at 2.7% year-over-year, up from the 2.6% reported last month.⁵ The slight increase was mostly anticipated and that’s why markets rallied on Wednesday; inflation was a tad higher, but not high enough to prevent the Fed from lowering rates by another quarter-percent at its final meeting of the year.

The CPI remains stubbornly above the Fed’s 2.0% mandate, suggesting inflation progress has stalled. The 12-month reading rose for the second month in a row. Notably, that 2.7% gain in prices over the past year was despite a 3.2% decline in energy prices over the same one-year period.

Stripping out both food and energy (known as core CPI) shows a 3.3% increase in the past year. The main driver of core inflation has been housing rents, which rose again in November. The Producer Price Index (PPI) rose 0.4% in November, and prices have been accelerating over the past six months.⁶ The rise in November was led by food prices, which jumped 3.1% due to nearly a 56% surge in egg prices due to the bird flu, which has hurt egg production. Plus, energy prices rose slightly by 0.2%.

The food and energy categories have played an outsized role in the inflation readings over recent months. Even when you strip out these historically volatile components, “core” producer prices still rose 0.2% in November and are up 3.4% in the past year, a notable acceleration from the 1.9% reading this time last year.

What does all this mean for markets? First, prices are continuing to rise and pinch the consumer, who accounts for 70% of the economy. Second, the Fed may have to slow its roll with any additional rate cuts in 2025. That leaves the markets — which are priced to perfection right now — vulnerable because the Fed may not deliver as many rate hikes as the market is pricing in. Right now, markets are expecting rates to be lower by about 1% this time next year. They’ll be disappointed if that doesn’t happen, and we know that almost never ends well.

Coming This Week

• This week is probably the last hurrah for data and a “normal” trading week before we hit the holiday season. That’s not to say we won’t have any news or activity, but with Christmas and New Year’s Day both falling on a Wednesday, markets will be slow after this week.
• Data for this week includes the NY manufacturing survey, and S&P flash PMI for services and manufacturing on Monday. We’ll get retail sales, industrial production and the home builder confidence index on Tuesday, then MBA mortgage applications, housing starts and building permits on Wednesday.
• The final Fed meeting of the year will happen on Tuesday and Wednesday, and Fed Chair Jerome Powell will have his final press conference of the year. As of now, the odds of a final 25-basis-point cut stand around 96%.⁷
• On Thursday, we’ll get weekly unemployment claims and the second revision of third-quarter gross domestic product (GDP). The first revision remained at 2.8%.⁸ Additionally, we’ll get the Philly Fed survey, existing home sales and leading indicators for November.
• We finish the week off with consumer sentiment and the Personal Consumption Expenditures (PCE) and Core PCE reading. We need to see improvement here if we are to expect additional cuts next year from the Fed.

Sources:

¹ Yahoo! Finance. “NASDAQ Composite (ˆIXIC).” https://finance.yahoo.com/quote/%5EIXIC/. Accessed Dec. 14, 2024.

² Yahoo! Finance. “S&P 500 (ˆGSPC).” https://finance.yahoo.com/quote/%5EGSPC/. Accessed Dec. 14, 2024.

³ Yahoo! Finance. “Dow Jones Industrial Average (ˆDJI).” https://finance.yahoo.com/quote/%5EDJI/. Accessed Dec. 14, 2024.

⁴ CME Group. “FedWatch.” https://www.cmegroup.com/markets/interest-rates/cme-fedwatch-tool.html. Accessed Dec. 14, 2024.

⁵ U.S. Bureau of Labor Statistics. Dec. 11, 2024. “Consumer Price Index Summary.” https://www.bls.gov/news.release/cpi.nr0.htm. Accessed Dec. 14, 2024.

⁶ U.S. Bureau of Labor Statistics. Dec. 12, 2024. “Producer Price Index News Release Summary.” https://www.bls.gov/news.release/ppi.nr0.htm. Accessed Dec. 14, 2024.

⁷ CME Group. “FedWatch.” https://www.cmegroup.com/markets/interest-rates/cme-fedwatch-tool.html. Accessed Dec. 14, 2024.

⁸ Bureau of Economic Analysis. Nov. 27, 2024. “Gross Domestic Product, Third Quarter 2024 (Second Estimate) and Corporate Profits (Preliminary).” https://www.bea.gov/news/2024/gross-domestic-product-third-quarter-2024-second-estimate-and-corporate-profits. Accessed Dec. 14, 2024.

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