- Stocks waver on strong economic data: Equity markets finished lower on Tuesday, reversing gains at the open, following a batch of strong economic data that sent bond yields higher. The ISM services PMI for December was 54.1, better than expectations of 53 and signaling ongoing strength in the services sector of the U.S. economy.* The fly in the ointment from today's report was that the prices subindex rose to a near two-year high of 64.4, raising concerns on the future path of inflation. JOLTS job openings also exceeded expectations, with job openings for November rising to 8.1 million versus expectations for 7.7 million, signaling that demand for labor remains strong.* In response, bond yields surged higher, with the 10-year Treasury yield climbing to nearly 4.7%.* Stocks declined, with the S&P 500 lower by roughly 1.1%, while the Nasdaq closed down by 1.9%.* Growth sectors of the market, such as technology and consumer discretionary, were among the laggards, while defensive sectors, such as health care, fared better. Energy was another sector outperforming, supported by higher oil prices, which are at their highest since October.
- Jobs data in focus: A busy week of labor-market data began this morning with the release of JOLTS job openings for November. Job openings for November were 8.1 million, above expectations for 7.7 million and above the October reading of 7.8 million.* While well below the peak of 12 million job openings in March of 2022, 8.1 million job openings are still above pre-pandemic numbers.* Additionally, U.S. job openings exceed the number of unemployed (7.1 million), which, in our view, suggests that while labor-market conditions have moderated from historically strong levels, they remain healthy.* Perhaps the most anticipated data will come on Friday with the release of nonfarm payrolls and the unemployment rate for December. Expectations are for nonfarm payrolls to rise by 160,000 in December, while the unemployment rate is expected to hold steady at 4.2%.* Healthy labor-market conditions have been a source of strength for the U.S. economy over the past two years. In our view, labor-market conditions will remain broadly supportive in 2025, helping extend the economic expansion.
- We expect balanced performance between growth and value stocks in 2025: Growth-style stocks outperformed value stocks for the second consecutive year in 2024, with the Russell 1000 Growth Index rising by 33% including dividends, versus 14% for the Russell 1000 Value Index.* Robust earnings growth and enthusiasm around the potential of artificial intelligence has driven the outperformance in growth stocks in recent years. While we acknowledge reason for optimism in growth stocks, we believe opportunities are emerging that could lead to more balanced performance between growth- and value-style stocks in 2025. Specifically, profit growth is expected to not only be strong in mega-cap tech stocks (which comprise a large portion of the Russell 1000 Growth Index), but also in value-style stocks. In fact, analyst expectations are for earnings in the Russell 1000 Value Index to grow by roughly 12% in 2025, which, if achieved, would be the strongest earnings growth since 2021.* Additionally, value stocks tend to generate a higher share of their revenue from domestic sources compared with growth stocks.* This could make value stocks less sensitive to trade policy uncertainty over the coming months. As part of our opportunistic portfolio guidance, we recommend a neutral allocation between growth and value stocks. To view our entire suite of portfolio guidance, check out our Monthly Portfolio Brief.
Brock Weimer, CFA
Investment Strategy
Source: *FactSet
Growth stocks represented by the Russell 1000 Growth Index.
Value stocks represented by the Russell 1000 Value Index.
Sector references are GICS sectors of the S&P 500.
- Stocks rise to begin the week: Major equity markets were mostly higher on Monday. From a leadership standpoint, growth sectors, such as technology and communication services, led markets higher. Defensive sectors, such as utilities and consumer staples, were among the laggards, along with the interest-rate-sensitive real estate sector.* Overseas, Asian markets were lower overnight, while European markets traded higher following reports surfacing that President-elect Trump's universal tariff proposal could be limited to critical industries such as steel and aluminum.* This contrasts with initial talks that the universal tariffs would be applied to all imported goods. However, shortly after the news surfaced, Trump disputed the report on social media, saying it was wrong. Despite Trump's dispute, the U.S. dollar index was weaker by roughly 0.6% in response to the potential for dialed-back tariff plans. Bond yields ticked higher, with the 10-year Treasury yield back above the 4.6% mark, while the 2-year yield closed around 4.27%.*
- Busy week of labor-market data ahead: Labor-market data will be front and center for markets beginning tomorrow with JOLTS job openings for November. Expectations are for job openings to remain roughly unchanged at 7.7 million. While well below the peak of 12 million job openings in March of 2022, 7.7 million job openings are still above pre-pandemic levels.* Wednesday will bring the ADP Employment Survey for December, where expectations are for private employers to have added 140,000 jobs for the month.* Perhaps the most anticipated data will come on Friday with the release of nonfarm payrolls and the unemployment rate for December. Expectations are for nonfarm payrolls to rise by 160,000 in December, while the unemployment rate is expected to hold steady at 4.2%.* Healthy labor-market conditions have been a source of strength for the U.S. economy over the past two years. In our view, labor-market conditions will remain broadly supportive in 2025, helping extend the economic expansion.
- European economic data points to ongoing weakness: Markit PMI data for December suggest the eurozone economy is entering 2025 on soft footing. The PMI is a diffusion index, where readings above 50 signal economic expansion and readings below 50 signal contraction. The eurozone composite PMI was 49.6 in December, the second month in a row of contraction and the seventh consecutive month below the 20-year average of roughly 52.* Higher interest rates and higher energy costs following Russia's invasion of Ukraine have weighed on economic activity in the eurozone, particularly in the manufacturing sector. While energy costs have fallen, the headline producer price index in the eurozone remains nearly 40% higher today than in December 2020.* We expect economic momentum in Europe to lag the U.S. in 2025. As part of our opportunistic asset-allocation guidance, we recommend investors underweight developed international large-cap and developed international small- and mid-cap stocks, while offsetting these underweights with an overweight to U.S. large- and mid-cap stocks.
Brock Weimer, CFA
Investment Strategy
Source: *FactSet
Sector references are GICS sectors of the S&P 500.
- 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.