Stocks Look to Close 2024 on a High Note
The S&P 500 is poised to set its 57th closing record in 2024, bolstered by today’s payroll report reinforcing the case for the Federal Reserve to cut interest rates in December. The mixed report failed to deliver any significant upside surprise in the labor market that would have raised concerns that the economy could be re-accelerating, potentially threatening further progress on inflation.
Fed Chair Jerome Powell said the economy is “in remarkably good shape” earlier in the week. On monetary policy, he said the FOMC can afford to be cautious as they lower rates toward a neutral level - one that neither stimulates nor restricts the economy. Powell added that inflation is still not quite back to the Fed’s 2% target, but he saw no reason the economy couldn’t continue to grow. However, the Fed’s preferred measure of underlying inflation accelerated to its highest level since April, rendering further credence for a cautious approach to additional rate reductions.
For much of 2024 the soft-landing thesis of moderate growth, low unemployment, and falling inflation drove bond yields lower. Upward revisions to growth estimates and an unsustainable federal budget deficit, however, led to a sharp rebound in yields. If inflation continues to remain sticky, the Fed’s capacity for lowering rates in 2025 will be limited. At the upcoming Fed meeting on December 17-18, they will update their quarterly Summary of Economic Projections. The changes in their projections will be noteworthy of how the various members of the Fed are viewing the shifting backdrop for 2025 and beyond. Bonds are likely to remain volatile as they are caught between the early stages of a Fed easing cycle, and inflationary pressures and skyrocketing federal debt.
Like stocks, the U.S. dollar has enjoyed a strong 2024 and is trading at its highest level since 2022, with the Bloomberg Dollar Spot Index gaining over 5.50% year-to-date. This is thanks in large part to a resilient U.S. economy, and the view that the Fed’s patience on cutting rates will bolster investor flows into U.S. assets. The dollar is also a beneficiary of uncertain times, acting as a haven during the recent political uncertainties in Europe and Asia.
The march higher in the U.S. stock market has been relentless, and the outperformance of U.S. stocks versus its global peers has been historic. The market is forecasting an unusual combination of accelerating profit growth and rate cuts, and while this is a bullish scenario, its outcome is improbable. Stocks appear overvalued on a host of measures (price-to-sales, price-to-book, EV/EBITDA), and its market cap-to-GDP ratio has never been higher. Gauges of sentiment, positioning, and volatility are sending signals of exuberance. A lot of good news has been pulled forward, from the prospect of corporate tax cuts to deregulation. Equities may also need to recalibrate to what may be a slower and shallower Fed rate-cutting cycle than what markets are currently pricing in. Now the focus of markets and the Fed will turn to next week’s CPI report for the final major data point before the December FOMC meeting to confirm the likelihood of an interest rate cut.
Ryan Babeuf, CFA
Market Strategist
Ryan.Babeuf@EdgeWealth.com
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