Investment Commentary – December 9, 2024

Market Movements

US

Major stock indexes ended mixed in a week that saw the S&P 500 Index and Nasdaq Composite all continue to hit record highs, while the Russell 2000 Small Cap Index declined after back-to-back weeks of outperformance versus its larger-cap peers. As measured by Russell 1000 indexes, growth shares outperformed value stocks by 553 basis points (5.53 percentage points), the largest margin since the week ended March 17, 2023.

Sector performance was also widely dispersed as consumer discretionary, communication services, and information technology shares all gained over 3% for the week, while energy, utilities, and materials stocks— typically more value-oriented segments of the market—all fell over 3%. Geopolitical headlines through the first half of the week were largely dominated by French and South Korean politics, though these seemed to have limited impact on U.S. markets.

Europe

In local currency terms, the pan-European STOXX Europe 600 Index ended 2.0% higher, as jitters about political instability in France abated. Markets also appeared to anticipate faster policy easing by the European Central Bank (ECB). Major stock indexes rose as well. Germany’s DAX climbed 3.9%, Italy’s FTSE MIB gained 4.0%, and France’s CAC 40 Index put on 2.7%. The UK’s FTSE 100 Index added 0.3%.

However, key macroeconomic data in Europe continued to point to a slowing economy in the fourth quarter of the year. In Germany (Europe’s largest economy), manufacturing continued to struggle. Industrial output fell by 1.0% month over month, falling short of expectations for a 1.2% rebound. Factory orders weakened 1.5% on the month, with demand for machinery and equipment declining the most. The ECB may be moving away from its data-dependent approach, the bank’s chief economist, Philip Lane, indicated in a Financial Times podcast. He said future policy decisions would need to focus on upcoming risks rather than being backward-looking, particularly once the central bank is confident that inflation is on track to meet its 2% target.

China

Chinese stocks rose in anticipation of fresh stimulus measures, along with resilient manufacturing data released the prior week. The Shanghai Composite Index gained 2.3%, while the Hong Kong benchmark Hang Seng Index added 2.2%. Many analysts expect China’s leadership will announce further action to support the economy. However, the value of new home sales by the country’s top 100 developers fell 6.9% in November from a year ago, according to the China Real Estate Information Corp. The persistent slide in new home prices showed China's property sector has yet to show a sustained recovery and supported the view that Beijing will need to announce further measures to address the sector’s multi-year decline.

Equities

The S&P 500 returned 1.0% and closed the week at an all-time high. Fed Chair Powell remarked that the economy was in “remarkably good shape.” Jobs data later in the week pointed to a slowly moderating labor market with solid growth but a slightly higher unemployment rate. Consumer discretionary (+5.9%), communication services (+4.1%), and technology (+3.4%) were the best performing sectors in the S&P 500; all other sectors finished in the red with energy (-4.5%), and utilities (-3.8%) being the laggards. EAFE markets returned 1.7% with gains in the Japan (+2.1%), and Europe (+2.0%). EM markets returned +2.0%, with gains in China (+2.1%) and India (+2.0%) offset by losses in Korea (-2.2%), where markets were gripped by political turmoil.

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 23.1% (vs. 10.4% annualized over the last 20 years). For the next 12 months, EPS growth for the Russell 2000 is expected to be 28.0% (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 continued to edge lower across the curve. Municipals returned 0.4%, US AGG returned 0.5% and US IG returned 0.5%. HY bonds returned 0.4%, while bank loans returned 0.2%. EM debt returned 0.7% as the US dollar rose 0.3%.

Rates

Rates fell edged lower across the curve as the jobs data showing a solid but moderating labor market boosted bets that the Fed would continue with rate cuts. The recession-watch 3M-10Y spread compressed 7bps and closed the week at -26. The 2Y-10Y spread widened 3bps to +5. Rates rose in other developed markets. The BTP-Bund spread is at 1.09%. 5-year breakeven inflation expectations fell 1bp and now sit at 2.33% (peak on Nov 6 of 2.44% vs low of 1.88% on Sept 10); 10-year breakeven inflation expectations fell 1bp and now sit at 2.25% (peak on Nov 6 of 2.40% vs recent low of 2.03% on Sept 10); the 10Y real yield fell 1bp to 1.90%. The market now expects the Fed to cut once more in 2024 (Dec meeting probability at 86%) and between two and three 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 3.7% vs. the Fed’s guidance of 3.25%-3.5%.

Currencies/Commodities

The dollar rose 0.3%. The commodities complex fell 0.7% as energy prices fell 1.8% for the week. Brent prices fell to $71/bbl. US natural gas prices fell 8.5%, while European gas fell 2.8%, with warmer weather expected in the near term.

Market monitors

Volatility fell for equities and for bonds (VIX = 13, MOVE = 83); the 10-year average for each is VIX=18, MOVE = 78. Market sentiment (at midweek) rebounded from -2 to 18 as investors remain optimistic.