Daily market snapshot

• NASDAQ leads stocks higher – Equity markets broke their losing streak on Friday, with small-cap stocks leading large- and mid-cap stocks. Sector performance was broad, as consumer discretionary and technology stocks posted the largest gains, reflecting a risk-on tone. In global markets, Asia was down on continued growth concerns in China. Europe was also lower, led by automotive stocks as some electric vehicle (EV) models failed to qualify for U.S. tax credits under new, stricter rules. The U.S. dollar declined versus major currencies. In the commodity space, WTI oil traded higher, while gold was down*.
• Manufacturing reading beats estimates – The Institute for Supply Management (ISM) Manufacturing Purchasing Managers' Index (PMI) rose to 49.3 in December, above forecasts calling for 48.4*. PMI is a diffusion index, with readings above 50.0 reflecting expansion. While December's figure still shows modest contraction, the trend has improved in recent months, rising from the recent low of 46.5 in October. In addition, services PMI, which represents the majority of the economy, reflects expansion. This is supportive of resilient economic growth and the soft landing narrative, in our view.
• Bond yields edge higher – The 10-year Treasury is yield was up at 4.60%, extending its broader trend higher over the past few months. The benchmark yield has risen more than 90 basis points (0.9%) from the recent low in September as bond markets** and the Federal Reserve*** have reduced expectations for cuts to the fed funds rate. Markets are now pricing in just one additional interest rate cut in 2025 as disinflation has slowed and labor markets remain resilient. With the fed funds rate now around 4.5% and core personal consumption expenditure (PCE) inflation around 2.8%, we believe there is room to bring interest rates down to a less restrictive policy stance, perhaps settling in the 3.5% to 4% range. Lower rates should reduce borrowing costs for business and consumers, which is typically favorable for the economy.

Brian Therien, CFA
Investment Strategy

^{Source: *FactSet **CME Fedwatch ***U.S. Federal Reserve}

• Stocks edge lower to start the year – Equity markets closed lower on Thursday, reversing gains from earlier in the day. Global markets were mixed, as Asia was down on new data for December showing that manufacturing slowed in China. Europe was mostly higher, led by energy stocks. Bond yields dropped, with the 10-year Treasury yield at 4.56%. The U.S. dollar continued its rise versus major currencies. In the commodity space, WTI oil and gold traded higher*.
• Jobless claims tick down: Initial jobless claims dropped to 211,000 this past week, below estimates calling for about 220,000*. Weekly jobless claims averaged about 223,000 over the past month, which is about in line with the weekly average for 2024, indicating that the trend appears to be stable. In addition, continuing claims, which measure the number of people receiving unemployment benefits, declined to 1.84 million, below expectations for 1.89 million. We believe these readings, combined with other recent data, reflect a resilient labor market that is gradually normalizing, as employers appear to be slowly pulling back on hiring but not turning to significant layoffs. With unemployment of 4.2%, well below the long-term average of about 5.7%*, disposable income should be sufficient to support consumer spending. A cooling labor market should also lead to slower wage gains ahead, which typically help ease inflation.
• Manufacturing readings beat estimates – The Markit Manufacturing Purchasing Managers' Index (PMI) rose to 49.4 in December**, above forecasts and the preliminary reading, both of which were about 48.3*. PMI is a diffusion index, with readings above 50.0 reflecting expansion. While December's figure still shows modest contraction, the trend has improved in recent months, rising from the recent low of 47.3 in September. In addition, services PMI, which represents the majority of the economy, reflects expansion, which is supportive of resilient economic growth and the soft landing narrative, in our view.

Brian Therien, CFA
Investment Strategy

^{Source: *FactSet **S&P Global}

• Stocks tick lower on final trading day of 2024: Equity markets finished lower on Tuesday with the S&P 500 declining by 0.4% and the NASDAQ shedding 0.9%* From a leadership standpoint, energy was the top performing sector of the S&P 500, supported by a spike in oil prices, while growth sectors such as technology and consumer discretionary were among the laggards.* Despite finishing lower in each of the last four trading sessions, the S&P 500 finished the year up by 23%, marking the second consecutive year with returns over 20%.* Overseas, Asian markets were mostly lower overnight while European markets traded higher. Longer-term bond yields ticked higher with the 10-year Treasury yield rising to 4.57% while the 2-year Treasury yield was little changed at 4.24%.* In the commodity space, oil prices rose by over 1% while gold finished higher by 0.8%.*
• Bonds deliver positive returns in 2024: U.S. investment-grade bonds are on pace for another year of positive returns in 2024, with the Bloomberg U.S. Aggregate Index higher by 1.4% through yesterday's close.** This year's return follows a healthy 5.5% return in 2023, however the index remains roughly 9% below its all-time high achieved in August 2020.** In our view, elevated yields relative to history should lead to healthy returns from investment-grade bonds in the years ahead. Looking around the horn, international bonds are set for 4.9% gain in 2024 while cash is on pace to close higher by 5.3%.** Lower-quality issuers have been the top performers in 2024, with high-yield bonds on pace for an 8.2% gain while emerging-market debt is higher by 6.6%.**
• Housing price data in focus: Housing-market data was back in focus on Tuesday with a read on home price trends in October. The S&P/Case-Shiller National Home Price Index rose by 0.3% in October and 3.6% on an annual basis.* The FHFA Home Price Index rose by 0.4% in October and 4.5% on an annual basis.* Despite higher borrowing costs, home prices have proven resilient with both the S&P/Case-Shiller and FHFA Indexes at all-time highs. In our view, this has been in part due to low inventory levels of existing homes for sale as homeowners have been reluctant to sell their homes and forfeit a mortgage rate which was locked in prior to 2022. Additionally, healthy labor-market conditions and strong household balance sheets have likely helped put a floor on housing demand over the past two years, supporting prices. We'd expect home prices to continue to rise at a pace roughly consistent with wage growth over the coming years, perhaps in the 3%-4% range.

Brock Weimer, CFA
Investment Strategy

^{Source: Morningstar Direct, Total return through 12/31/2024.}

Monday, 12/30/2024 p.m.

• Stocks slide to start the week: Equity markets closed lower on Monday, with the S&P 500 finishing down 1.1%.* Today's move follows a risk-off trading session on Friday, when both the S&P 500 and Nasdaq fell by over 1%. Today's move lower was broad-based, with all 11 sectors of the S&P 500 finishing the day in negative territory.* With no key corporate or economic news out over the past two trading sessions, we'd chalk up the risk-off move in markets to profit-taking and rebalancing from investors after what's been another strong year of equity-market performance. Overseas, Asian markets were mixed overnight, while European markets traded mostly lower. Bond yields finished the day lower, with the 10-year Treasury yield falling to around the 4.54% mark, while the 2-year Treasury yield closed down to 4.26%.*
• U.S. equities led the way in 2024: It’s been another strong year of equity-market performance in U.S. stocks, with the S&P 500 higher by nearly 27%, including dividends, through Friday's close.** U.S. small- and mid-cap stocks have seen strong returns as well, with the Russell 2000 and Russell Mid-cap Indexes each higher by 12% or more.** International equity markets have struggled to keep pace, with the MSCI EAFE Index (which measures developed international large-cap stocks) up by a modest 5%, while the MSCI EM Index (which measures emerging-market stocks) has gained roughly 8.8%.** Strong economic momentum and corporate profit growth in the U.S. has supported the year-to-date outperformance in U.S. stocks. Additionally, a stronger U.S. dollar, particularly in the past few months, has meaningfully weighed on returns for international equities. As part of our opportunistic allocation guidance, we favor U.S. stocks over international developed stocks, and we believe 2025 will bring another year of U.S. outperformance.
• Housing-market data in focus: Today provided a look into trends in the U.S. housing market, with pending home sales for November. Pending home sales measure housing activity based on real estate contracts for existing single-family homes, condos and co-ops and can serve as a leading indicator for existing home sales.* The pending home sales index rose to 79 in November, better than expectations and the highest reading since February 2023.* However, the index remains well below the long-run average of roughly 102.* Elevated interest rates have weighed on housing-market activity over the past two years. Higher interest rates not only make the cost of financing a new home more expensive due to higher interest payments, but also make it less attractive for existing homeowners to sell their homes and forfeit a lower interest rate on their existing mortgage if it was originated prior to 2022. As the Fed continues to normalize policy, we expect that housing-market activity should improve over the coming year.

Brock Weimer, CFA
Investment Strategy

^{Source: *FactSet **FactSet, Total return in USD through 12/27/2024.}

• Stocks finish lower: U.S. equity markets closed lower on Friday with weakness in mega-cap technology stocks weighing on market performance. The S&P 500 finished lower by 1.1% while the tech-heavy NASDAQ declined by 1.5%.* U.S. small-cap stocks were under pressure today as well with the Russell 2000 declining by over 1.5%.* With no major corporate or economic news out today, we'd attribute the risk-off move to profit taking after what's been a strong year of stock market performance. Asian markets were mixed overnight with Japan's Nikkei logging a 1.8% gain while markets in China were flat. Longer-term bond yields finished higher with the 10-year Treasury yield closing above the 4.6% mark while the 2-year yield was little changed at 4.33%.*
• Bond yields holding near highs for the year: The 10-year U.S. Treasury yield rose again on Friday, finishing above the 4.6% mark. Since the Fed delivered a 0.5% interest-rate cut on September 18, the 10-year yield has risen by nearly 1%.* Healthy U.S. economic data and uncertainty around inflation have accompanied the move higher in yields.* In response, performance of investment-grade bonds has been lackluster. Through September 18, the year-to-date return of the Bloomberg U.S. Aggregate Bond Index was 4.7%.* With yields spiking, the index has given back most of its prior gain, and is now up only 1.2% year-to-date.* Looking ahead, we expect the 10-year Treasury yield to spend most of 2025 in the 4% - 4.5% range. In our view, Fed rate cuts should prevent yields from rising much above the 4.5% mark while healthy economic growth and uncertainty over inflation and widening deficits should prevent yields from falling much below the 4% mark.
• Performance check-in; Growth sectors in the lead: It's been another strong year of performance for U.S. equity markets with the S&P 500 higher by over 28% including dividends through yesterday's close.* At a sector level, it's been familiar faces driving the gains for the S&P 500. Communication services and information technology have been the top performing sectors in 2024, each higher by over 40%.** Consumer discretionary has been the next best performer, gaining 36%.* These three sectors were the top performers in 2023 as well. Enthusiasm around the growth potential of AI and robust corporate profit growth has led to strong performance in U.S. mega-cap tech stocks over the past two years. While we acknowledge there are reasons for optimism in this area of the market, we believe market leadership could broaden in 2025 beyond mega-cap tech stocks. In particular, profit growth in value-style stocks is expected to accelerate in 2025 after a period of lackluster growth. Additionally, value-style stocks tend to generate a higher percentage of revenue from U.S. sources, potentially making them less sensitive to trade-policy uncertainty. In our view, this creates a favorable backdrop for broad participation in equity markets over the coming year, potentially rewarding those with well-balanced portfolios.

Brock Weimer, CFA
Investment Strategy

^{Source: *FactSet **FactSet, GICS sectors of the S&P 500. Total return through 12/26/2024.}