Weekly Newsletter: December 15, 2024
The discussion between the markets and crypto could be the same between Elphaba and Glinda in Wicked: “With you and I defying gravity, they’ll never bring us down.” Last week saw more stocks fall than rise in all but one day. More stocks fell than rose on the week, yet the markets barely budged and the tech stock rose on the week. Cryptocurrencies have been defying gravity for the past couple of years as the number of “currencies” has risen to nearly 20k. How can so many different “currencies” exist and be taken seriously? There is even one named Fartcoin. At the heart of the markets, both for stocks and crypto, is loose monetary policy from the Fed and fiscal policy from Washington. The consumer and producer prices were released last week, indicating inflation remains “stuck” around the 3% range, above the Fed’s 2% target. According to the Fed, this would argue that rates should be cut by another quarter percent. Job growth remains relatively strong as do wage gains, yet there is a need to cut rates. Will the markets continue to defy gravity or, like Icarus, fall back to earth after flying too high?
The financial market will be open all week; however, the main event will be the Fed meeting on Wednesday. Following the press conference, traders are likely to begin the Christmas holiday. There are likely to be questions about the level of inflation and how cutting rates “solves” “sticky” inflation. The Fed will also be releasing its projections for economic growth, inflation, and unemployment for 2025/26. They see economic growth staying at 2% for the foreseeable future, and short-term interest rates falling by over a full percentage point by early 2026. Their measure of inflation, the personal consumption expenditure index (PCE), which is released on Friday, is projected to fall to 2% by 2026 and remain steady afterward. The current PCE is just above that 2% target and much lower than the inflation measures just reported in both the consumer and producer price indices. While they may be declaring victory in their inflation fight, the average consumer is having a rough time agreeing that it has been a success.
For all the cheering about the rise in stock prices this year, it has been a banner year in the bond market, as long as the focus has been on areas other than treasuries. High-yield bonds have returned over 8%, corporate bonds over 3.5% Even commercial real estate loans rose over 4.7%. All this while the intermediate treasury bond returned less than 0.50%. Risk was the name of the game in the bond market this year, but can it continue? The difference between the yields on treasuries and corporate bonds is at their lowest level in over a decade. Even high-yield bonds do not provide much more than treasuries. The key to returns in 2025 will be the direction of inflation. If prices continue to moderate (maybe fall?), yields can drop and investors enjoy a nice return from their bond portfolio.
It is interesting to see days where more stocks decline than rise and the markets hit all-time highs. There have only been 2-3 of those in the past and each of them provides little insight into the future of stocks today. Within the SP500, there has been a slight decline in the sectors above their long-term average price, meaning fewer sectors are keeping prices afloat. In an average year, stocks may decline 5-10% at least once during the year. In 2022 stocks dropped 20%, in 2023, there were two instances and so far, none in 2024. Investors have upped their estimates of how high stock can go in 2025 and may be very disappointed that the euphoria does not quite pan out next year.
The Fed will cut by a quarter of a percent on Wednesday and trading should slow down dramatically afterward as traders close up shop for the year.
The opinions expressed in the Investment Newsletter are those of the author and are based upon information that is believed to be accurate and reliable but are opinions and do not constitute a guarantee of present or future financial market conditions.