Looking at the futures market, stocks appear set for a negative open to today’s trading. Early this morning, the U.S. Census Bureau released its advance economic indicators report for the month of November. The U.S. trade deficit stepped up 4.7%, month over month, to $102.9 billion. During the second half of this year, the deficit has alternated between modest increases and declines. High production of low-cost products exported from China has made it difficult for the U.S. to gain any traction in improving its global trade balance. The tilt of the U.S. economy to domestic consumption, in contrast to China’s aim to build exports, suggests no significant reversal is in sight over the coming years, even with President-elect Trump’s tariffs waiting in the wings.
The Bureau’s data showed that retail inventories rose 0.3% last month, compared to 0.1% growth in October. Inventories on store shelves have showed much improvement, following a low hit in July of 2020 in the midst of the coronavirus pandemic. Near-full employment and continued wage growth are helping to support retail sales and the broader economy. Conversely, the Census Bureau also noted this morning that November wholesale inventories slipped 0.2%, against a 0.2% rise in the previous month. With the exception of four months, wholesaler stocks have increased for much of 2024. This, we believe, reflects ongoing confidence among goods suppliers that retail business will stay healthy into 2025.
Earlier in this Christmas-holiday-shortened week, investors shrugged off some unfavorable news, by way of the consumer confidence index, durable goods orders, and new home sales. One positive for the economy was a slightly lower tally of weekly initial jobless claims. For all of this week, it looks as if the tech-weighted NASDAQ composite will post an advance of close to 2%, followed by the broader Standard & Poor’s 500 index, which may improve about 1.5%. The blue-chip Dow Jones Industrial Average is holding up the rear, likely rising nearly 1%. We note that heavy yearend options trading, rather than company and economic fundamentals, is having an outsized impact on share-price momentum. Generally, we expect incremental gains in valuations to the end of 2024.
Positive market momentum might well be sustained into the first two weeks of 2025. That’s because many investors are now engaged in “tax-loss harvesting,” more specifically, selling their losers to limit tax obligations on 2024 capital gains. The funds received will probably be put back to work in early 2025, thereby giving a lift to the market indexes. Too, traders’ optimism surrounding the coming inauguration of a U.S. president focused on reducing business regulation, cutting taxes, and implementing tariffs on imports is likely lending support.
Notwithstanding the current market optimism, we would not be surprised to see heightened share-price volatility during most of the first half of 2025. The major market indexes are on track to post their second year of double-digit price advances in 2024, which is historically unusual. High price-earnings ratios have many on Wall Street saying the markets are “priced to perfection,” meaning that any corporate earnings disappointments in the quarters ahead could result in outsized share-price pullbacks. We’re not forecasting a sharp downturn, but one is quite plausible. Too, the degree of Mr. Trump’s success in implementing new government policies could lead to visible swings in stock prices. Additionally, caution on the part of the Federal Reserve, in cutting short-term interest rates, due to stubborn inflation, may lead to turmoil in the markets. Moreover, geopolitics might come back into the forefront in influencing stock trading.
In the near term, investors would probably do well to build some cash reserves, while maintaining a core of large-cap holdings in their portfolios, rounded out by some exposure to mid- and small-cap equities. Attractive buying opportunities could emerge over the course of 2025. – David M. Reimer
At the time of this article’s writing, the author did not hold positions in any of the companies mentioned.
CLICK HERE for more information on our services or call 1-800-VALUELINE (1-800-825-8354). Our account managers are available Monday through Friday, 8:00 AM to 6:00 PM Eastern Time.
