Weekly Market Update: December 23, 2024

The U.S. economy is performing well as 2024 draws to a close. The 12-month advance has been driven by the consumer sector, with growth in the services area at the core of the gain. The Atlanta Federal Reserve’s GDP Now model, which incorporates real-time data throughout the quarter to project economic growth, estimates that the economy expanded at an annualized pace of 3.3% in the final quarter of 2024. While the Atlanta Fed forecast tends to be more optimistic than most, a number of the big money center banks also have raised their GDP prognostications. 

But with the strong pace of economic growth often come worries about inflation. On point, both consumer and producer price growth were stronger than expected in November. This has been a trend this fall after the pace of price increases slowed over the summer months. On a 12-month basis, the headline readings for the Consumer and Producer Price Indexes increased 2.7% and 3.0%, respectively, up from their October levels. Shortly after we went to press, the Personal Consumption Expenditures (PCE) Price Index, the assessment of inflation most closely watched by the Fed, also was expected to show an uptick in the pace of price growth.

The labor market held up well this year, but there are signs of softening conditions as the calendar turns to 2025. Indeed, the unemployment rate ticked up to 4.2% in November, and that was accompanied by an unexpected drop in the labor force participation rate. These metrics, along with a pickup in initial unemployment claims at the start of December, suggest some emerging weakness in the labor sector. The Fed, which has a dual mandate to promote price stability and foster full employment, is unlikely to reverse monetary policy course next year, but the number of interest-rate cuts may be dialed back a bit. Not surprisingly, Treasury yields are again rising, as sentiment is building that the Fed will be slightly less dovish in 2025 than most economists had previously expected.

Conclusion: The market has shaken off the possibility of a less-dovish Fed next year and cheered the improved near-term outlook for the U.S. economy. In this environment, we think a portfolio led by high-quality stocks is still warranted.

Source: ValueLine.com