The futures market is pointing to a positive open to today’s stock trading. Early this morning, the Bureau of Labor Statistics released additional inflation data. Import prices for the month of November rose one tenth of a percentage point, versus the outlook for a 0.2% contraction and an expansion of 0.3% in October. Excluding volatile fuel prices, import prices were up 0.2%, matching that of the previous month. On a year-over-year basis, headline and adjusted prices increased 1.3% and 0.8%, respectively, both stronger than expected.
This latest inflation data comes in the wake of reports on consumer and producer prices in recent days. Generally, the consumer price index (CPI) and the producer price index (PPI) for November, though largely in line with estimates, showed sustained upward momentum, causing disappointment on Wall Street.
Stocks may only be able to post incremental gains for this week. Investors were showing trepidation prior to the CPI and PPI releases, and some of their fears were validated. That said, we still believe the Federal Reserve will cut short-term interest rates at its meeting scheduled for December 17-18. The cut likely will be 25 basis points, to the 4.25%-4.50% range. Though inflation is proving sticky, the Fed also has an eye on the employment scene. Notably, yesterday’s initial jobless claims number for the week ended December 7th was above estimates.
Several central bank officials continue to view current rate levels as restrictive to the U.S. economy. Even so, estimates of the “neutral rate,” the rate that does not promote contraction or expansion, appear to be rising from somewhere in the high-3% range to an area in the low-4% span. That suggests the possibility of just one or two more 25-basis-point cuts in 2025.
Historically, the first half of December has proven to be a bit choppy, with regard to share-price performance, with more-positive market momentum occurring late in the month (a.k.a, the “Santa Claus” rally). We would not bet against stocks over the term to yearend. As of Thursday’s close, year to date, the NASDAQ, Standard & Poor’s 500, and the Dow Jones Industrial Average were up about 33%, 27%, and 17%, respectively, on track for a second year of very strong gains.
There’s a lot of optimism on Wall Street about Donald Trump’s coming second term as President. He is inclined to scale back federal regulation and corporate taxes, while consolidating or eliminating government agencies to save money. The optimism is tempered some by economists’ concerns that proposed higher import tariffs and more-limited immigration will spark renewed inflation, hurting business expansion. Too, Mr. Trump needs consent from Congress in many areas to implement his policies, which is not a sure thing; many government programs are considered sacrosanct by our representatives.
The major U.S. stock market indexes are now trading at price-earnings ratios above the historical averages. This warrants caution on the part of investors, even though positive share-price momentum could well be maintained in early 2025. It would not be ill-advised for investors to cash in on their gains, building up some cash reserves to put to work during any periods of marked market weakness. Volatility seems likely to pick up in the first half of next year.
Stock portfolio diversification is essential. Investors would do well to hold a core of solid large-cap equities in their portfolios, and to take on no more than modest exposure to mid- and small-cap growth stocks. – David M. Reimer
At the time of this article’s writing, the author did not hold positions in any of the companies mentioned.
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