Major U.S. indexes ended lower this week, coming off record highs midweek on a well-received consumer inflation report that propelled the Nasdaq Composite to its first close about 20,000. Emerging markets fared well on some stimulus optimism in China, while a rate cut from the European Central Bank (ECB) and political uncertainty in France and Germany left European markets down modestly for the week. Bonds sold off as yields continued to move higher despite the increased probability of another interest rate cut from the Federal Reserve next week. The 10-year yield ended the week more than 25 basis points (0.25%) higher. Commodities rose broadly led by oil on potential sanctions on Russian and Iranian oil. 

Stock Index Performance

S&P 500 Index Sectors

Fixed Income and Commodities

Source: LPL Research, Bloomberg 12/13/24 @2:25 p.m. ET
Disclosures: Indexes are unmanaged and cannot be invested in directly.

U.S. and International Equities      

U.S. Equities: U.S. stocks fell this week as market watchers digested mixed inflation data, though it was good enough for markets to nearly fully price in a rate cut at next week’s Fed meeting. It was not, however, good enough to prevent Treasury yields from rising, which presented a headwind for stocks. Weak market breadth was a key storyline for market-watchers this week. Consider that heading into Friday’s session, the S&P 500 had seen decliners outpace advancers nine straight days, a very rare but not quite unprecedented occurrence. Earnings also played a role in market direction this week. Earnings winners included Broadcom (AVGO) and Restoration Hardware (RH), while Adobe (ADBE) and Oracle (ORCL) were among earnings losers.  

Turning to sectors, communication services outperformed in large part due to near double-digit gains in Alphabet (GOOG/L), while Tesla (TSLA) shares gave the consumer discretionary sector a boost with its 10% advance. Quantum computing headlines and easing anti-trust fears boosted GOOG/L. Conversely, interest rate sensitive sectors struggled with rising interest rates. 

From a style perspective, growth stocks continued to fare better than their value counterparts this week. The top growth sectors including communication services, consumer discretionary, and technology – where the Magnificent Seven live – generally outperformed the value-oriented sectors, including energy, financials, materials, real estate, and utilities. 

Small caps underperformed this week, suggesting market participants may have become a bit more risk averse with year-end approaching. The most pronounced small cap weakness came from the biotech industry and nearly half of the Russell 2000 underperformance for the week was attributable to the healthcare sector. 

 International Equities: International equities broadly edged lower this week amid continued strength in the U.S. dollar. The European Central Bank (ECB) cut rates as expected and gave the market confidence more cuts were coming, but a softer economic growth outlook and political uncertainty in France and Germany took some of the bloom off the rose. 

Emerging markets (EM) fared better than the U.S. and developed international markets as the MSCI EM Index eked out a small weekly gain despite U.S. dollar strength. The 800-pound gorilla in the index, China, managed a slight gain on stimulus optimism despite an underwhelming message coming out of an economic planning conference. Korea was a surprise gainer even as time may be running out for the country’s President Yoon Suk Yeol with an impeachment vote reportedly on tap for Saturday. Saudi Arabia was another weekly winner on higher oil prices and potential Russian and Iranian sanctions. 

Fixed Income, Currency, and Commodity Markets      

Fixed Income: The Bloomberg U.S. Aggregate Index traded mostly lower on the week after yields continued to move higher despite the increased probability of another interest rate cut from the Fed next week. The 10-year yield ended the week more than 25 basis points (0.25%) higher, while the rate sensitive two-year yield was higher by more than 15 basis points (0.15%).  Corporate credit spreads, both investment-grade and high-yield, remain at or near secular tights.  

Last week’s payroll report had something for everyone: a beat on the headline jobs number (good) but an increase in the unemployment rate (bad) but ultimately the bond market rallied on the back of the higher unemployment rate. This week’s consumer inflation data largely came in line with expectations (but still above the Fed’s 2% target) and, coupled with the increase in the unemployment rate, has likely solidified a rate cut next week from the Fed. Market pricing suggests there is a 97% chance the Fed cuts rates by 0.25% at next week’s meeting to take the fed funds rate (upper bound) to 4.50%.  

As mentioned though, despite the increased probability of a rate cut next week, Treasury yields are higher this week, which is somewhat reminiscent of the price action in bonds after the Fed cut rates initially in September. As we noted in the 2025 Outlook: Pragmatic Optimism, there are several structural reasons why longer-term bond yields could remain high despite the Fed cutting interest rates; deficit spending, a glut of Treasury debt and a still flat yield curve may keep rates from falling absent an economic contraction. The move higher in yields this week though was also impacted by a slight tick up in inflation expectations. Nearly half of the move higher in the 10-year this week came from higher inflation expectations, which suggests the bond market may not be fully convinced the inflation genie is back in the bottle. But with the yield curve still relatively flat, investors can take advantage of still high relative yields in the front end of corporate and Treasury yield curves without taking on a lot of credit or interest rate risk. 

Commodities and Currencies: Commodities advanced this week despite rising U.S. interest rates and a stronger dollar. The Bloomberg Commodity Index advanced just over 1% and recaptured support near its 50-day moving average. Energy outperformed within the commodities complex, with West Texas Intermediate crude oil climbing 6%. Potential U.S. sanctions on Russian and Iranian oil underpinned the rally and offset supply concerns. The International Energy Agency (IEA) forecasted global oil markets would face a 1.4 million barrels a day surplus next year. On the demand side, the culmination of this week’s Central Economic Work Conference in China revealed policymakers’ increased appetite for lower rates and fiscal spending, renewing hope for demand from the world’s largest oil importer. In metals, gold outperformed with a gain of 0.8%. A benign consumer inflation report nearly solidified probabilities for a Fed rate cut next week, while a Russian airstrike in Ukraine propped up gold’s geopolitical risk premium. The U.S. Dollar Index rose 0.9% aboard a six-day winning streak. The greenback wrapped up the week near the 107 area of key resistance, a level marking the upper end of the dollar’s multi-year range. Weakness in the euro contributed to the dollar’s advance as the ECB delivered a dovish 0.25% cut this week. .   

Economic Weekly Roundup      

November consumer inflation in line with expectations. Core inflation rose 0.3% month over month for the fourth consecutive time, indicating a stable yet hot monthly cadence. Annual core inflation rate was unchanged at 3.3%, driven mostly by housing. The headline inflation rate rose to 2.7% from 2.6% as base effects played a key role. Items that increased last month were new and used vehicles, furnishings, and medical care. Total consumer inflation excluding shelter was 1.6% and is a good barometer of price pressures since the majority of households own their homes. Real hourly earnings rose 1.3%, giving the consumer plenty of strength to keep spending.  

Bottom Line: Roughly a third of the inflation metric is “Owners’ Equivalent Rent”, an imputed value and not a realized expense for homeowners. Wages are growing faster than inflation, putting consumers on good footing as they enter the new year. The Fed will likely stay on course to slowly and methodically cut rates as the stickier components of inflation are stabilizing.

Companies Plan to Boost Spending. This week’s release from the National Federation of Independent Business (NFIB) shows businesses plan to put their capital spending into overdrive. The percentage of businesses planning to increase capital spending in the very near term rose to 28%, the highest since January 2022, when companies were spending a lot to accommodate hybrid workers. But 2025 capital spending plans are not uniformly positive across industries. Chevron (CVX) plans to lower spending relative to 2024, but others such as MDU Resources (MDU) have ramped up plans given the demand for more infrastructure. Further, overall business optimism spiked to the highest since June 2021 and is now close to pre-pandemic levels. 

Bottom Line: In general, businesses find the current macro context to be positive for increasing capital spending which will be supportive to overall economic growth next year.

The Week Ahead          

The following economic data is slated for the week ahead:    

• Monday:  Empire Manufacturing, S&P Global US Manufacturing PMI, S&P Global US Services PMI, S&P Global US Composite PMI 
• Tuesday:  Retail Sales, Industrial Production MoM, Capacity Utilization, Manufacturing Production, Business Inventories, NAHB Housing Market Index 
• Wednesday: FOMC Rate Decision; FOMC Summary of Economic Projections, Building Permits, Housing Starts 
• Thursday: GDP, Personal Consumption, Jobless Claims, Continuing Claims, Leading Index 
• Friday: Personal Income, Personal Spending, Core and Headline PCE Price Index