Quick Takes:
- Stock Markets Woes. Equity markets fell during a more challenging December after rallying November. A combination of Fed outlook changes, policy uncertainty, global conflict escalation, and other events hurt investors in December.
- Inflation and Interest Rates. The 10Y treasury yield rose in December from 4.2% to nearly 4.6%. Unemployment rose slightly from 4.1% to 4.2% and nonfarm payrolls increased by 227k. CPI inflation rose to 2.7% in November from 2.6% in October. PCE inflation came in at 2.4%, below the forecasted 2.5%. The Fed cut rates by 25 bps.
- Labor Strikes. Workers at Amazon and Starbucks went on strike leading into the holiday season in December. 5,500 Amazon workers across the country went on strike just 10 days before Christmas. The Starbucks strike began at a few locations in major cities on December 20. 5,000 baristas across the US were on strike by Christmas Eve.
- Assad Regime Falls. Syrian President Bashar al Assad’s government was overthrown by the opposition in Syria in early December after years of civil war. Assad had been in power for 24 years. The fall of his government was a geopolitical shock to Russia and Iran that were his main foreign backers.
Asset Class Performance
Large caps outperformed small caps in December. US stocks lagged international markets during the month amid tariff and trade concerns and a more cautious Fed rate outlook for 2025. Domestic and international assets alike ended the month lower including both fixed-income and equities.
Markets & Macroeconomics
Economic data releases in December generally indicated strong continued activity in the US and lower-than-expected price pressures for consumers. Headline PCE inflation for November came in at 2.4% versus the 2.5% year-over-year increase anticipated by economists. The Core PCE figure was also lower than forecasted at 2.8% versus the projected 2.9%. CPI and Core CPI inflation were both in line with expectations at 2.7% and 3.3% respectively for November. One sticking point in the inflation numbers was producer price inflation. PPI inflation came in at 3.0% versus the forecasted 2.6% for November while Core PPI inflation was 3.4% compared to a consensus projection of 3.2%. In the labor market, the US added 227k jobs, ahead of the expected 220k in November.
Despite better-than-expected job growth, the unemployment rate rose to 4.2% from 4.1% and the Labor Force Participation Rate (LFPR) fell slightly from 62.6% in October to 62.5% in November. Real wage growth also slowed in November from a 1.4% year-over-year increase in both hourly and weekly wages in October to a 1.3% and a 1.0% increase respectively in November. Consumers continued to spend in November, but spending shifted toward cars as retail sales growth month over-month in November came in at 0.7% versus the expected 0.6%, but retail sales excluding car sales grew just 0.2% compared to the forecasted 0.4% for the month. While services activity remains strong, industrial activity continues to be weaker. Industrial production fell 0.1% from October levels in November, much lower than the 0.3% growth expected by economists.
The Preliminary US Manufacturing PMI came in at just 48.3 versus the expected 49.5 for December. The FOMC decided to cut rates by 25 bps at their December 18 meeting but indicated that there will likely be fewer rate cuts in 2025 than previously anticipated by investors. The FOMC will meet next on January 29 and interest rate derivative markets have priced in a near 89% probability of no change in rates. Given the more hawkish rate outlook, treasury yields rose and stocks fell in December despite the Fed rate cut. The 10Y treasury yield ended 2024 just below 4.6% and the 30Y mortgage rate ended the year at over 7%.
Bottom Line: In an effort to maintain a strong labor market, the Fed is still looking to cut interest rates, but must balance the risks to the labor market against still above-target inflation. A more hawkish rate outlook for 2025 as announced at the latest FOMC meeting on December 18 hurt stock and bond performance through the end of the year as investors reset their macroeconomic expectations.
