Weekly Recap:

by Michael P. Reinking, CFA - Sr. Market Strategist

The last full trading week of 2024 is in the books. It was eventful, volatile and there were some record-breaking volumes. To start the week the breadth continued to deteriorate beneath the surface with mega-cap tech stocks continuing their recent outperformance. The most interesting stat I had seen this week came from Deutsche Bank which highlighted that decliners in the S&P 500 had outpaced advancers index for 12 consecutive sessions ahead of this week’s big catalyst, the FOMC policy decision on Wednesday. That was the longest streak since 1978 which lasted for 14 sessions, spoiler alert with today’s snapback that streak still stands as the second longest behind only the 1920’s. Despite that fact, the S&P 500 was trading within 1% of its all-time high. However, the drawdowns in other indices were more pronounced with many of the areas of the market that had outperformed immediately following the election giving back over half of those gains.

Part of that weakness was associated with the reset in Treasury yields which had been moving higher in response to stronger than expected economic data, a set of inflation reports that suggested the disinflationary process was stalling, and expectations that the Federal Reserve would deliver a hawkish cut signaling fewer cuts next year. I’ll talk through some of those details below, but at a high level that is pretty much what they did. Despite the fact that markets had presumably recalibrated the decision was followed by an aggressive selloff in both Treasuries and equities. The S&P 500 fell ~3% as the mega-cap tech stocks finally gave way to the gravitational pull. The Dow Jones Industrial Average was down a similar amount falling for the tenth consecutive session the longest streak since 1974. Small and mid-cap indices fell ~4% pretty much wiping out their post-election gains.

There was a hawkish pivot in Fed messaging but much of the communication was similar to what officials had been saying before the media blackout window. So the question is what drove that weakness? Chair Powell highlighted the amount of uncertainty in the current environment and the path of policy going forward during his press conference, in addition some of the messaging and data did not necessarily foot which seemed to create more questions than answers - the exact opposite of the certainty markets crave. However, I think there were some other dynamics at play. Coming into the Fed meeting there was some hope that the catalyst would be a clearing event, helping to re-solidify the rally heading into the end of the year a positive seasonal time period for markets historically. However, as the Chair didn’t walk back some of the hawkishness coming out of the prepared materials it seemed that traders began to throw in the towel reducing exposure after a strong year, before liquidity started to dry up. As major indices began to break through round numbers the fact that it is options expiration week, likely added to that downside momentum. I would also note that in the final hour of trade there were headlines that the stop gap funding bill had fallen apart. This added to the weakness highlighting the slim margins in Congress will make it difficult to push through President elect Trump’s agenda next year. For the last couple of days, I said the selloff felt like an overreaction.

On Thursday, there was a tepid bounce attempt in the morning but that faded as the second attempt in Congress failed. However, following the better-than-expected inflation data this morning and a couple of dovish Fed officials taking to the airwaves, equity markets rebounded sharply recouping about half of the post Fed selloff, but did fade in the back half of the day as the Treasury rally ran out of steam.

Today was the last big liquidity event of the year with triple witch expiration and the S&P quarterly index rebalances and the volumes did not disappoint. It was the fourth largest total trading volume in history with nearly 4B shares on the tape and the second largest NYSE closing auction by volume with nearly 2.9B shares trading behind only Q3. However, it was the largest notional trading day and closing auction in the record books at nearly $250B and ~$183B, respectively. 

Global Markets - it was a rough week pretty much across the globe

Asia - some modest outperformance. Keep in mind those markets did not benefit from the US bounce today.

Europe - most European indices were down between 2% - 3%. There were multiple central bank rate decisions in the region which unlike the Fed leaned on the dovish side of things including the BOE which left rates unchanged in a 6-3 vote. 

Emerging Markets - particularly tough week for these indices. India’s Sensex which had been one of the better performers earlier this year fell 5% this week closing just below its 200d ma. It is down nearly 10% from the high hit in late September. 

Commodities - mostly lower. 

Oil - ended the week down ~2% giving back about half of last week’s rally. It failed to break above the recent highs and 50/100d ma’s.  Key levels are ~70 / ~75 outside of that the chop continues. 

Nat gas -  big rally in the US amidst forecasts for colder weather and President Trump suggesting tariffs on the EU if they don’t reduce trade deficits by purchasing US energy. The commodity broke above the 200d which it hasn’t been able to hold above since late 2022. 

Metals - mostly lower but bounced today. 

Ag - also pulled back

Bitcoin - with the risk off trade during the week Bitcoin also pulled back. Overnight it tested the early December low ~92k before a big bounce today potentially leaving a reversal candle with a big bottoming tail (a hammer for those candlestick watchers out there) trading back up to ~97k.

The Committee cut rates by 25bps taking the upper end of the fed funds target to 4.5% bringing the totality of rate cuts since September to 1%. The only change to the language in the statement was in the forward guidance where the qualifier “the extent and timing of additional adjustments to the target” was added. This firmly put a pause, potentially an extended one, on the table. There was also one dissension on the committee with Cleveland’s Fed president Beth Hammack who joined the committee in August preferring to leave rates unchanged. She released a statement earlier today saying that her decision was a “close call” a phrase Chair Powell also used during the press conference about the decision more broadly. She highlighted her concerns about inflation returning to target and her belief that rates are not far from neutral for her decision.  When looking at the DOTS in the Summary of Economic projections you could see there were at least three other officials that shared that opinion, publicly at least.

The DOTS showed the median expectation was for the Fed to cut only two additional times next year down from four at the September meeting with two more in 2026. This was also what futures markets were implying ahead of Wednesday. The projection for next year’s real GDP was revised up slightly while the unemployment rate moved a tick lower to 4.3%. However, there were big adjustments to the inflation projections with both headline and core PCE expected to be at 2.5% up from 2.1% and 2.2%, respectively with Core-PCE not expected to hit the Fed’s 2% target until 2027

There was also a big clue deeper in the SEP when looking at balance of risks where the committee now believed that the risks to employment were now broadly balanced from weighted to the upside but 15 of 19 officials now believed the risks to inflation were weighted to the upside up from only 4 in September, which also signaled a much more significant shift than what had been communicated before the Fed’s media blackout window. This is where markets focused. The Fed has a dual mandate to promote maximum employment and stable prices. Throughout 2022, 2023 and most of 2024 the focus was solely on inflation fight. However, at the end of the summer the Committee told us that they were now focused on the employment side of the mandate which led them to begin cutting rates. After this week’s meeting it became clear that pendulum has once again swung back in the other direction. 

There was quite a bit of mixed messaging coming from the Chairman during the press conference but much of the communication was in line with what we’ve heard from officials recently. Chair Powell suggested the economy remains strong, the labor market conditions are easing but had exceeded expectations and were not a source of inflationary pressure while also pointing to some of the silver linings that we discussed in last week’s inflation data. So, the question is where is that concern coming from? And that is where the press conference got a bit interesting. The Chairman highlighted that some officials had begun including the potential impact of Washington policy into their projections which is a piece of what drove the inflation projections. And when prompted by a question, he pointed to the scenario analysis in the Fed’s Teal Book from 2018 for a framework as to how the Fed may think about and react to tariffs going forward. The Chairman pointed directly back to the scenario analysis and the see-through paragraph which said that the conditions for that to occur would be “anchored inflation expectations and the passthrough of cost shocks into inflation being relatively short lived”. It is clear this topic is top of mind for the Committee.

Beyond the shift in focus back to inflation the other major message the Chairman tried to deliver was that now that rates were less restrictive after the recent cuts, and with the uncertainty that the Committee would be cautious in moving policy going forward, something officials had been messaging previously as well. The analogy also shifted from pulling a boat into port to slowing down when you’re driving in the fog which I guess was the acknowledgment of that uncertainty.

This morning, personal income came in a tenth below expectations up 0.3% half the pace of last month’s increase. Personal was also a tenth light at 0.4% in line with last month’s reading. Meanwhile PCE headline and core also came in a tenth below estimates both for the month and on an annual basis up 0.1%. YoY the readings were 2.4% and 2.8% respectively. Chair Powell had suggested that these numbers would look good (and most of the inputs were known after CPI/PPI), so this was not too surprising, but this was Fed friendly data nonetheless and helped to take off some of the edge.

In addition, Fed officials didn’t let the hawkish narrative fester for to long with NY Fed President Williams and Chicago President Goolsbee taking to the airwaves following the economic data. Williams, who is considered one of the experts on the neutral rate, continued to say that he believed rates are still above that rate. He was later followed by Goolsbee, who will be a voter in 2025 for the record, did acknowledge some concerns about inflation but was encouraged by today’s data. He also disagreed with Hammack regarding how far rates are above neutral.

Rates did move lower this morning in response to the data and commentary but a good portion of that unwound throughout the session. For the week there was some steepening of the curve with the 2yr up 7bps while 10/30yr yields were up ~13bps. The 2-10 spread hit its steepest level going back to 2022 peaking ~28bps yesterday. 

Through yesterday investment grade spreads were wider by 2-4bps.

High yield - Through yesterday European and Emerging markets spreads tightened slightly. However, US spreads were wider by ~25bps

The ICE Bank of America (ICE BofA) total returns for indices covering the U.S. were mostly lower.

Next week there is not too much on the calendar and I'd expect the attendance and volumes to really thin out. In the US there are a couple of pieces of economic data to pay attention to including consumer confidence, durable/capital goods orders and claims. I'm sure there will be some more Fed officials but I don't see much on the scheduled calendar at this point. The situation in Congress remains in flux so let's see how that plays out. The idea is to keep next week's commentary to a minimum assuming markets cooperate (famous last words). At this point I'd like to thank everyone who has made it this far, for your readership and support. It is truly an honor to have this platform. On behalf of the NYSE I'd like to wish you and your loved ones a happy and healthy holiday season.

And lastly I'd like to use this platform to scream from the mountain tops (or into a void) -  WE ARE! - before I head out on a five hour, maybe snow filled journey, to State College, PA for the first ever home CFP game. Let's Go PSU!  Have a great weekend!

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