Investment Commentary – December 2, 2024

Summary

U.S. Stocks ended a shortened trading session higher, while Treasury Yields declined across the curve. The S&P 500 climbed more than 1% for a second consecutive week. Meanwhile, the 10-year Treasury Yield fell to 4.17%. Optimism around Trump’s Treasury secretary pick has buoyed U.S. Stocks and Bonds while weakening the dollar, with expectations that tariff policies will remain measured. The S&P 500 gained 5.7% in November, marking its best month of the year. Investors poured $141 billion into U.S. Equities during the month, the largest Four-Week inflow on record, according to EPFR Global data. A surge in a handful of tech giants has propelled U.S. Stocks to a 26% year-to-date gain, driven by the prospect of Federal Reserve rate cuts alongside sustained economic growth. As December begins, market participants turn their attention to upcoming employment data, which could offer critical guidance ahead of the Fed’s final rate decision in two weeks. In France, Prime Minister Michel Barnier amended the proposed 2025 budget that seeks EUR 60 billion of savings, dropping plans to raise electricity taxes after far-right leader Marine Le Pen threatened to call a no-confidence motion and bring down the coalition government. Borrowing costs for France hit a 12-year high relative to Germany this week and briefly rose above those of Greece for the first time ever on Thursday as markets became roiled by politics in Paris.

Equities

The S&P 500 returned 1.1% and closed the week at an all-time high as markets speculated that President-elect Donald Trump would temper his most extreme trade policies. Consumer discretionary (+2.4%) and healthcare (+2.2%) were the best-performing sectors in the S&P 500; energy (-2.0%) was the only sector in the red. EAFE markets returned 1.8%, with gains in Japan (+2.6%) and Europe (+1.8%). EM markets returned - 0.8%, with gains in India (+1.5%) offset by losses in Brazil (-5.9%) and Korea (-2.2%). From a valuation perspective, U.S. markets (other than midcaps) trade above +1 standard deviation based on historical forward P/E ratios as the S&P 500 is at +2.1, the NASDAQ is at +1.4 and U.S. small caps are at +1.6. For the next 12 months, EPS growth for S&P 500 is expected to be 10.6% (vs. 6.9% annualized over the last 20 years). For the next 12 months, EPS growth for NASDAQ is expected to be 18.9% (vs. 10.4% annualized over the last 20 years). For the next 12 months, EPS growth for the Russell 2000 is expected to be 26.8% (vs. 6.9% annualized over the last 20 years). All U.S. indices, including the S&P 500 (US Large Cap), NASDAQ, Russell Midcap (US Midcap), and the Russell 2000 (US Small Cap) trade at or above their 20-year averages based on forward P/E ratios while the MSCI EAFE (Non-US Developed Market Equities) and MSCI EM (EM Equities) are inline.

Fixed Income

Investment-grade fixed-income sectors posted positive returns, and rates fell across the curve. Municipals returned 0.7%, US AGG returned 1.4%, and US IG returned 1.6%. HY bonds returned 0.4%, while bank loans returned 0.2%. EM debt returned 0.7% as the U.S. dollar fell 1.7%.

Rates

Rates fell across the curve as Trump’s pick of hedge-fund manager Scott Bessent gave markets hope that tariffs will be measured, sending treasury yields and the U.S. dollar lower. The recession-watch 3M-10Y spread widened by 18bps and closed the week at -33. The 2Y-10Y spread compressed 1bp to +1. Rates dropped in other developed markets as well. The BTP-Bund spread is at 1.19%. 5-year breakeven inflation expectations fell 9bps and now sit at 2.35% (peak on Nov 6 of 2.44% vs. low of 1.88% on Sept 10); 10-year breakeven inflation expectations fell 9bp and now sit at 2.27% (peak on Nov 6 of 2.40% vs. a recent low of 2.03% on Sept 10); the 10Y real yield fell 15bps to 1.91%. The market now expects the Fed to cut once more in 2024 (Dec meeting probability at 62%) and two times in 2025 vs the Fed’s guidance of four cuts in 2025. At year-end 2025, the market expects the Fed Funds rate to be 3.8% vs. the Fed’s guidance of 3.25%-3.5%.

Currencies/Commodities

The dollar fell 1.7% from its highest level in two years. The commodities complex fell 2.0% as energy prices fell 3.7% for the week. Brent prices fell to $73/bbl. U.S. natural gas prices rose 7.5% while European gas rose 3.3%, both on expectations of cooler weather.

Market monitors

Volatility fell for equities and for bonds (VIX = 14, MOVE = 95); the 10-year average for each is VIX=18, MOVE = 78. Market sentiment (at midweek) fell to -2 from 8 as investors are starting to feel they’ve had too much of a good thing.