Financial Update: Week of December 23, 2024
Major U.S. stock indexes fell last week courtesy of a Fed that delivered a 25-basis-point rate cut but projected only two rate cuts in 2025. Initially, markets reacted negatively, but by the end of the week, new inflation data somewhat revitalized investor sentiment.
Last week, the S&P 500 declined by 1.99%, the Nasdaq 100 dropped by 2.25%, and the Dow Jones Industrial Average decreased by 2.25%.
As we approach year-end amid Fed messaging shifting, it is the perfect time to keep you updated on the latest developments.
Fed Rate Cut & Message
The Fed delivered on the widely expected 25-basis-point rate cut, but major stock indexes responded in a decidedly risk-off manner. The reason? Projections for 2025 rate cuts were revised downwardly as the Fed currently expects two rate cuts next year versus four previously.
And while equity markets sold off overall on the news, there are indeed some economists, including former Philadelphia Fed adviser Luke Tilley, that envision the Fed being more dovish in 2025. It is challenging to predict a year economically.
Potential tariff impacts and continued impacts of loose monetary policy surrounding the pandemic era are variables in play.
Volatility Spike and Interpretation
The Fed’s messaging resulted in the S&P 500 Volatility Index ($VIX) spiking on the news of the Fed dialing back its rate-cutting plans. It was the second-largest spike in history, increasing by nearly 74% on the day, indicating a quick rise of fear in the marketplace.
But so far, the extreme fear spike was short-lived. On Thursday, the day after the Fed announcement, the $VIX saw a decline of over 12%. And on Friday, the index tapered off heavily, down by nearly 23.79% in Friday’s session, as major stock indexes clawed back some of Wednesday’s declines.
So, it was a wild ride in volatile markets last week. The $VIX finished the week higher by around 32.95%, putting it firmly in the range we saw between July and October of this year. Perhaps the extreme rise in the $VIX on Wednesday afternoon was exaggerated; however, only time will tell.
Fear Index? It’s Price Movement.
The $VIX, known as the “Fear Index,” tends to get a bad rap and makes headlines when the S&P 500 trades to the downside. By definition, the $VIX tends to increase when the S&P 500 trades lower, as they have a mostly inverse correlation.
Most attention is paid to the Fear portion of the VIX, when in reality, it is an indicator of market volatility, both up and down. So, when the $VIX is elevated, investors can expect wider trading ranges in the S&P 500 and larger price swings in both directions, both up and down.
Many of the recent volatility spikes in 2024 were short-lived, and one has to wonder if this time will be the same or different. Again, only time will tell.
Fresh Inflation Data
All fixations were on the Fed last week until we got the data. After that, the stage was set for the Personal Consumption Expenditure (PCE) Price Index. Being the Fed’s favorite gauge of inflation, PCE data was a rather important one in the eyes of active market participants.
Friday’s data release showed us November PCE coming in lower than expected at a 2.4% annualized rate — a welcome indicator after the Fed’s 2025 projections.
The report was interpreted as dovish, leading to speculation that Wednesday’s selloff may have been an overreaction. Major U.S. stock indexes rallied on the last trading day of the week.
Government 10-Year Note Yields Rise
10-year note yields have been rising overall since September, even as the overall headline mood and expectations for lower rates rose. The old saying “Bond traders know first” seemed to hold true in Q4. Sometimes, markets tell a story before fundamentals show their colors, as many financial market products are forward-looking instruments.
10-year note yields rose last week, breaking above the psychologically important 4.50% level, settling the week near 4.524%, up from the prior weekly close near 4.399%. So, a roughly 12.5 basis point rise in yields last week, perhaps an indication that the shift in inflation and Fed sentiment garnered more footing.
Full Shopping Carts
While all eyes and ears were on the Fed last week, November monthly U.S. retail sales were strong. The resilient Teflon-like U.S. consumer continued to spend in November, as monthly U.S. retail sales rose 0.7% in November, an uptick from the 0.5% rise in October and beating expectations of a 0.6% monthly rise.
Retail strength was evident in motor vehicles and online purchases.
Week Ahead
As we begin this holiday-shortened trading week, the economic data calendar is nearly empty, with only the weekly unemployment claims being the major data release.
There is also some durable goods orders data and consumer confidence data that will be looked at. U.S. equity markets will be closed on Wednesday, December 25, in observance of Christmas and Hanukkah.
Grateful for Long-Term Investing
As long-term investors, let’s take a moment to express our gratitude as we approach the end of the year. Regardless of the interpretation of the Fed’s mood last week, 2024 is shaping up to be yet another banner year for long-term investors.
Perhaps investor sentiment had gotten ahead of itself in the short term in anticipation of rate cuts. Let’s see how the final two weeks go and if Santa Claus can find his way to the markets with the famous “Santa Claus Rally.”
And of course, whatever may be on your mind heading into the year-end, please feel free to email me or give me a call if I can be of service.
Disclosure:
This material provided by Levitate. Levitate is not affiliated with Valmark Securities, Inc. and Valmark Advisers, Inc. Indices are unmanaged and do not incur fees, one cannot directly invest in an index. Diversification does not guarantee investment returns and does not eliminate the risk of loss. Past performance does not guarantee future results. The information provided has been derived from sources believe to be reliable, but is not guaranteed as to accuracy and does not purport to be complete analysis of the material discussed, nor does is constitute an offer or a solicitation of an offer to buy any securities, products or services mentioned.
Disclosure:
This material provided by Levitate. Levitate is not affiliated with Valmark Securities, Inc. and Valmark Advisers, Inc. Indices are unmanaged and do not incur fees, one cannot directly invest in an index. Diversification does not guarantee investment returns and does not eliminate the risk of loss. Past performance does not guarantee future results. The information provided has been derived from sources believe to be reliable, but is not guaranteed as to accuracy and does not purport to be complete analysis of the material discussed, nor does is constitute an offer or a solicitation of an offer to buy any securities, products or services mentioned.