The U.S. stock market may have a hard time putting a bow on what has been another very good year for equities during the final two trading days of 2024, with the equity futures down sharply this morning. Year to date, the NASDAQ Composite and the broader S&P 500 Index were up an impressive 31.4% and 25.2%, respectively, entering the penultimate trading day of 2024. The Dow 30 and the small-cap Russell 2000 are on pace to produce more-modest gains, holding respective year-to-date increases of 14.1% and 10.7%.
The strong annual performance for the NASDAQ and S&P 500 Index was driven by the euphoria surrounding the AI-driven companies and their stocks, with the biggest winner over the 12-month stretch being semiconductor giant NVIDIA (NVDA). A late-year run by Magnificent Seven-member Tesla (TSLA) has also helped those two indexes outperform the Dow 30 and Russell 2000. Building sentiment over the course of the year that the Federal Reserve would begin cutting rates and a subsequent full-percentage point reduction to the federal funds rate also aided stocks until mid-December when the Federal Reserve held its last monetary policy meeting of 2024 (more below).
The typical late-year “Santa Claus” rally has not materialized, with the performance of stocks recently hitting a speed bump. On point, the equity futures are presaging a continuation of Friday’s selloff when trading commences stateside. Earlier this morning, the Dow 30 and NASDAQ futures were trading more than 400 and 300 points lower, respectively. A more-hawkish tone from the Federal Reserve on 2025 monetary policy, which included a reduction in its forecast of interest-rate cuts next year from four to two at the December Federal Open Market Committee (FOMC) meeting, spooked investors, especially with price-to-earnings multiples looking quite extended entering the final stretch of 2024.
Despite the central bank reducing the short-term benchmark interest rate by 100 basis points this fall, longer term Treasury yields continue to rise, with the rate on the 10-year note topping 6.60% this morning. This will likely keep long-term borrowing cost higher, with the rate on a 30-year fixed mortgage still well above 7.00%. In particular, this hurts the higher-growth, but often less-profitable companies that are valued on future cash-flow potential. That is because the higher discount rate reduces the value of those cash flows when discounted back to present-day terms. This makes the stocks of those companies less appealing to investors.
The next two trading days will be light on both economic and corporate news ahead of the New Year’s Day holiday on Wednesday. This may keep the attention of Wall Street on the role of the Federal Reserve heading into 2025, which has not been good for the domestic stock and bond markets over the last fortnight. Stronger-than-expected inflation data this fall and signs of some fatigue in the U.S. economy, including a sharper-than-expected drop in the December consumer confidence reading from The Conference Board last Monday, have been headwinds for the major equity averages.
Overall, it will be a very quiet week on the economic front, with the only report of significance coming Friday morning when the Institute for Supply Management releases it final 2024 reading on manufacturing activity. The December report is expected to show a continued contraction in the sector. On point, the latest reports on manufacturing activity in the New York and the greater Philadelphia areas came in weaker than expected, which is not a good sign for the sector heading into the new year. Given the higher borrowing costs, it is not overly surprising that the performances of the industrial and homebuilding sectors have been among the biggest laggards during the fourth quarter. Conversely, the technology stocks (notwithstanding the recent selloff on concerns about rising Treasury market yields) and consumer discretionary issues have performed well over the final three months of calendar 2024.
Meanwhile, investors should anticipate some year-end window dressing over the next few trading sessions. Window dressing is trading activity near the end of a quarter or fiscal year that is designed to improve the appearance of a portfolio to be presented to clients or shareholders. For example, a fund manager may sell losing positions so as to display only positions that have gained in value over the course of the year. We think this will be less of an issue for the market this year—though it could potentially add some volatility to trading the next few days—as it has been a successful year for most portfolio managers and thus the need to shuffle their top holdings is not a big priority. – William G. Ferguson
At the time of this article’s writing, the author did not hold positions in any of the companies mentioned.
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