Weekly Newsletter: December 23, 2024
The Three Wise Men, bringing inflation, government shutdown, and triple witching was not part of the Christmas story. However, the past week saw all in play in the financial markets, much to the chagrin of investors. Inflation seems to be back on the focus list for the Fed, as they indicated that rates are likely to stay higher for longer and they only foresee a couple of rate cuts in 2025. The story is similar to a year ago when forecasters predicted six (or more) rate cuts in 2024, yet we only got three (one of 0.50%). It has only been three months since the Fed began cutting rates, with the first being that 0.50% cut, as fears of a slowing jobs market and inflation trending toward their target gave them confidence they could cut rates. That story has changed a bit in just three months. The government shutdown is the regular dance done in Washington regarding the debt ceiling, limits, and funding of operations. Political points are made along with a lot of harumphing, but in the end, a bill is passed keeping things going. This was not on the radar screen until this past week when it was assumed things would pass without a peep. Finally, triple witching, the expiration of stock options, index futures, and index options on futures all occur on the third Friday of each quarter. This generally pushes volume and sometimes volatility, very high. This expiration reversed the December trend of lower prices in dramatic fashion. Whether it holds into the thinly traded year-end will be worth watching.
The main event last week was the Fed meeting. Plenty to watch, assimilate, and question. First up was the foregone conclusion of a quarter-point cut in rates. Second, was the “dot-plots”, or where Fed governors thought interest rates/inflation/GDP growth were heading in 2025/6. The surprise there were only two more rate cuts penciled in vs. the assumed four and inflation would be flattening out above 2%. Combined with better economic growth projections, the Fed is deciding (for now) that rates would be cut at a much slower pace. There was an implicit nod toward the higher inflation data that jarred the financial markets, pushing equities down 3% on the day. Interest rates continued to rise, as they have been since the first cut. Effectively calling the Fed’sinflation projections nonsense. The Fed still sees monetary policy as restrictive, but with the economy still doing well (check out airports this holiday season), that policy may not have much bite. This week starts two broken weeks of trading and little “big” economic reports. Anticipate a much quieter Wall Street heading into the New Year.
If monetary policy is tight, credit spreads, or the difference between corporate and treasury yields, would be much higher. Instead, they are near multi-decade lows. After yields dropped going into mid-year they have turned higher on the year. The sticky inflation data has rates now above where they were at the beginning of 2024, even as the Fed is cutting. Until there is better inflation data, interest rates are likely to stick around current levels, if not higher in the coming months. The worry in the markets is that the Fed is/has not stamped out inflation and those burning embers could re-ignite down the road.
The SP500, before Friday’s rally, erased the last eight weeks of gains. Many indices are down 5%+ for the month. The light on the snow-covered horizon is the decline has washed out some speculative activities and could set the stage for better markets in the coming weeks. However, the holiday season tends to be very quiet, and the big economic data comes in the week following New Year’s Day. Within the SP500, there has been little movement in the ranking of the various sectors. That may change as the new year unfolds and investors sell some of their big gain holdings, pushing off the tax payment until April 2026. Volatility may remain a key factor in the coming weeks and into the new administration beginning in late January.
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.