The futures market suggests that the major stock indexes will open in a positive manner today. Prior to the bell, the Federal Reserve Bank of New York released its Empire State Manufacturing Survey for the month of December. The index came in at a low 0.2, versus economists’ expectation of 10.0 and the previous month level of 31.2. This index, however, can be quite volatile month to month. It has indicated a recovery for much of this year, following marked weakness in 2022 and 2023.
Within the first half hour of today’s stock trading, S&P Global will announce the results of its own surveys on the domestic services and manufacturing sectors. Its “flash” purchasing managers index for services is estimated to have slipped to 55.3 this month from 56.1 in November. The reading on manufacturing is anticipated to be 49.6, only slightly below the previous level of 49.7. Generally, in recent months there’s been indications of a firming in manufacturing. The services sector has performed comparatively better for much of 2024, but there’s been a slackening of its expansion, lately. Still, we would not be surprised to see both sectors grow modestly in 2025.
Tomorrow, November data will roll out on U.S. retail sales, industrial production, capacity utilization, and home builder confidence. The outlook is positive on all of these data points. Early Wednesday morning, Wall Street will see new numbers on housing starts and building permits, also for November. Here too, the view is favorable.
Most important, on Wednesday afternoon, Federal Reserve Chairman Jerome Powell will hold a press conference on the central bank’s latest rate-making decision. It’s widely anticipated that the Fed will cut the federal funds rate, now 4.50%-4.75%, to 4.25%-4.50%. That’s even in the face of stronger-than-expected inflation. A softening labor market gives the central bank reason to ease its rate policy. Indeed, several Fed officials believe current short-term rates are too restrictive to support solid economic expansion.
We note, however, that the recently disappointing inflation data give the Fed the flexibility to take a more paced approach to cutting rates in 2025. Aside from monitoring inflation, unemployment, and business conditions, Fed officials will also need to consider the possible effects of actions on the part of the coming Trump presidential administration. Mr. Trump plans to raise import tariffs, reduce federal regulation, and streamline government agencies, while also pushing for reductions in corporate taxes. The economy could well expand nicely in 2025, but inflation might be reignited.
The domestic stock market indexes typically end a given year with gains in the final weeks. We believe this may well be the case for 2024. As of Friday’s close, the tech-heavy NASDAQ composite, broader Standard & Poor’s 500 index, and the blue-chip Dow Jones Industrial Average have advanced approximately 33%, 27%, and 16%, respectively, year to date. This good performance follows strong respective gains of 43%, 24%, and 14% in 2023.
The indexes are not far below their all-time records. Price-earnings ratios are above the historical averages. It will be difficult for the indexes to keep up such a vibrant pace in 2025. Investors would be prudent to cash in on some of their gains, building reserves they can put to use in the event of a market pullback. At this juncture, we do not anticipate a severe market downturn. That said, there’s uncertainty as to what extent the new Trump administration will be able to alter the economic and regulatory landscape. Additionally, Mr. Trump will have to deal with increased aggression from the hostile states of Russia, China, Iran, and North Korea, as well as continuing turmoil in the Middle East. Individual portfolios should emphasize stocks in stable, well-positioned large-cap companies. – 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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