Weekly Market Update: December 30, 2024
The nation’s economy continues to hold up nicely, and it is unlikely that a recession is looming on the horizon. GDP (gross domestic product) expanded at an annualized rate of 3.1% during the third quarter, and similar progress was likely achieved during the final quarter of 2024. The nation’s labor market remains healthy, with 227,000 jobs added to the economy in November, and the unemployment rate hovering just above the 4.0% mark. Nonetheless, inflation remains challenging. The PCE (Personal Consumption Expenditures) Price index, which is closely tracked by the Federal Reserve, showed prices rising 2.4% in November, year over year, which was better than anticipated, but higher than the Fed’s 2.0% target.
The Federal Reserve has adjusted its monetary policy. At its December meeting, the Fed lowered interest rates by 25 basis points, bringing the fed funds rate to 4.25%-4.50%. However, the central bank also expressed concerns about inflation and projected fewer rate cuts for 2025. Wall Street seemed surprised by the news, sending the stock market sharply lower. Meanwhile, the strong economy and current interest-rate outlook has sent the yield on the 10-year Treasury to about 4.5%, a level that could prove challenging for equities.
Corporate profits have been encouraging. We currently look for the companies in the S&P 500 index to post double-digit earnings growth in the fourth quarter and show solid progress for the full year 2024. Needless to say, most of the improvement will likely come from the mega-cap technology issues that have benefited from the excitement surrounding AI (artificial intelligence). Analysts are also calling for healthy earnings advances in 2025. However, some of this optimism may already be reflected in current equity valuations.
The S&P 500 has made notable progress over the past year. That said, stocks sold off following the Fed’s interest-rate announcement, and the CBOE Volatility index jumped over the 25 level, which suggests increased anxiety on the part of investors. The situation has since stabilized, but caution is probably warranted. In addition, we have some concerns that market breadth remains narrow and would prefer to see wider participation.
Conclusion: In the current environment, we suggest that subscribers maintain a portfolio of high-quality stocks with a healthy cash position.
Source: ValueLine.com
