Dear Friends,
As the stock market wrapped up a strong 2024, and we look ahead to 2025, the economic foundation remains stable. Corporate profits are rising, and the Federal Reserve (Fed) is expected to continue cutting rates next year, which will likely keep the current bull market on track. But investors will have to grapple with the fact that the market has already priced in a lot of good news. Positive surprises that drove stocks higher in the last year may be more difficult to come by in the year ahead. Inflation pressures are lingering, interest rates are rising, and geopolitical threats are significant. Find out more about what is driving the markets in this week’s newsletter.
Economy, Geopolitics, and Commodities
1. U.S. Jobs Data and Fed Minutes Will be in Focus Next Week
The focus in the coming week is on Friday’s key monthly nonfarm payroll data for December, which will give an up-to-date reading of employment levels and wages, as well as Federal Reserve minutes due Wednesday. Increasing evidence of a strong U.S. economy has led investors to scale back expectations for U.S. interest-rate cuts in 2025. U.S. money markets price in just over 40 basis points of rate cuts by December, a huge difference from the start of last year when markets were pricing as much as 150 basis points of rate cuts.
Further strong U.S. data could cause rate-cut expectations to be trimmed even further, especially as President-elect Trump is expected to announce policies including trade tariffs and tax cuts, which could boost the economy and stoke inflation after his inauguration on Jan. 20. The dollar recently hit a two-year high against a basket of currencies and strong economic data would likely lift it further while U.S. Treasury yields could also rise. The Fed reduced interest rates in December but also lowered its forecasts for future rate cuts. It now forecasts just two rate cuts in 2025. Ahead of Friday’s non-farm payrolls data, further clues on the health of the jobs market will be provided with Tuesday’s JOLTS November job opening figures, Wednesday’s ADP private payrolls data for December plus the latest weekly jobless claims numbers Thursday.1
2. US Manufacturing Measure Edged Higher at End of 2024
A US factory measure improved for a second month in December as orders and production picked up, suggesting the cloud over manufacturing may be starting to lift. The Institute for Supply Management’s manufacturing gauge rose almost a point to 49.3, the highest level since March, according to data released Friday. While still below 50 and indicating activity continues to shrink, the index was firmer than all but one estimate in a Bloomberg survey of economists.
The group’s measure of new orders rose more than 2 points to 52.5, the strongest reading since the start of last year and matching the highest since May 2022. The pickup in demand helped generate the first month of expanding production since May, based on the output gauge. At the same time, the survey revealed more producers reduced staffing levels at a faster rate. The employment index fell almost 3 points, the most since July, to 45.3 in December. The rest of the five measures that make up the overall purchasing managers gauge all improved.2
3. The American Worker Is Becoming More Productive
Productivity in the U.S., as measured by how much the average worker gets done in an hour, has been on the rise. That matters because the faster that productivity grows, the faster the economy can grow as well. The success of the U.S. economy, and why it has grown so much compared with other countries over the past century and more, has hinged on its productivity. Productivity—the total output of the economy divided by hours worked—rose 2% in the third quarter compared with a year earlier, according to the Labor Department. That marked the fifth quarter in a row with an increase of 2% or better. In the five years before the pandemic, there were only two such quarters.
The gains in part reflect massive changes in the U.S. economy since the onset of Covid-19. Companies learned new ways of doing things and adopted new technologies, while an upheaval in the labor market moved workers into more productive jobs. Another big change in the American labor force—a massive influx of immigration—might also have played a role. Immigrants are often slotted into manual-intensive jobs, which could allow other workers to move up to more highly skilled jobs.1
4. Euro-Zone Inflation Points to Lagarde’s Unfinished Task for 2025
Faster euro-zone inflation in data due next week is likely to remind policymakers that while their 2% goal might now be in sight, it’s not yet within reach. Consumer prices probably rose 2.4% in December from a year earlier, up slightly from the previous month’s result. The underlying gauge that strips out energy and other volatile items probably stayed at 2.7%, according to economists.
Such an outcome, stoked by fuel costs, will underscore the challenge still faced by European Central Bank President Christine Lagarde and her colleagues at the dawn of a new year. She heralded January with remarks expressing her hope that inflation will get to the goal at some point in 2025. The ECB’s own projections show the fourth quarter as the moment when 2% may be achieved. Resurgent gas prices in recent days are just one of the elements of a shifting backdrop that could endanger that outlook, while threatened US trade tariffs might further cloud the horizon.2
5. China Must Heed Lessons of Japan’s Lost Decades
Chinese stocks snapped a three-year losing streak in 2024 on hopes of more forceful stimulus from Beijing. The bond market, however, seems to be less sanguine. The MSCI China index rose 16% last year, its first annual gain since 2020. Much of the increase came after late September—when Beijing signaled stronger policy support to the economy. Since then, China has rolled out a $1.4 trillion package for the central government to take on the debts of local governments and promised more monetary stimulus this year.
The pessimism isn’t unfounded. China’s economy remains trapped in a deflationary quagmire, with producer prices falling for 26 consecutive months, dropping 2.5% year-over-year in November. Consumer inflation is barely hovering above zero, with prices inching up just 0.2% in the same period. That draws an uncomfortable parallel to Japan, which was mired in decades of deflation until forceful stimulus finally pulled it out in recent years. Indeed, China’s 30-year bond yield has now sunk below that of Japan, which stands at 2.3%. Similar to Japan’s property and stock bubble bursting in the early 1990s, China’s current predicament came after the implosion of its housing bubble around 2021.1
Financial Markets
1. S&P 500, Nasdaq Snap Five-Day Losing Streak
Stocks closed higher Friday as Wall Street recovered following a shaky start to the new year. The S&P 500 closed up 73.92 points, or 1.26%, at 5,942.47, and the Dow Jones Industrial Average advanced 339.86 points, or 0.8%, to end the day at 42,732.13. The Nasdaq Composite gained 340.88 points, or 1.77%, to close at 19,621.68. Tech stocks were a bright spot for the market on Friday. Chip giant Nvidia climbed 4.7%, while server maker Super Micro Computer jumped 10.9%.
Those stocks could benefit from continued spending on artificial intelligence, as will Constellation Energy and Vistra, with shares up 4% and 8.5%, respectively. Microsoft announced Friday that it would spend $80 billion on AI-enabled data centers in the 2025 fiscal year, and power producers have been boosted by the trend. The rally on Friday was broad, though some of the best performers were also big winners during last year’s rally. The dollar slipped from a multi-year high. The WSJ Dollar Index closed Thursday at 103.18, the highest since November 2022. Overseas indexes were mixed. Hong Kong’s Hang Seng Index and the Kospi in South Korea both gained; the Shanghai Composite dropped. European indexes were mostly lower.3
2. Big Retail Gets Bigger as Smaller Players Struggle
Big retailers already dominate Americans’ lives. Their grasp on consumers is only getting stronger. The three biggest retailers by revenue in the U.S.—Costco, Walmart, and Amazon accounted for about 11% of total retail sales back in 2014, based on their reported figures measured against national retail sales data from the Commerce Department. Their share of the market has been growing since then. In their last three reported quarters, the behemoths selling everything from groceries to appliances made up about 17% of retail sales and roughly 57% of retail sales growth over that period.
Supermarkets have been a chronic casualty of the big retailers’ rise. Grocery stores accounted for about two-thirds of food-at-home spending in the U.S. in 2000, but their share shrank to 54% in 2023, according to the U.S. Department of Agriculture. Over the same period, warehouse clubs and supercenters such as Costco and Walmart nearly doubled their market share to 23%. Amazon hasn’t grown its share of the grocery market much, but it captures a sizable share of everything else. Some well-known retail chains have filed for bankruptcy over the past few months, including Big Lots, the Container Store and Party City. It is difficult to draw a straight line between their demise and big retailers’ ascendance, but consumers these days can probably find a version of what these specialty retailers used to offer while browsing the aisles—both online and physical—of Walmart, Amazon, and the like.1
3. GM, Ford Report Best Annual US Sales Since 2019
Both General Motors and Ford Motor on Friday reported their best annual U.S. new vehicle sales since 2019, prior to impacts from the coronavirus pandemic and yearslong supply chain problems. Those results are in line with industrywide expectations for automakers. Market research firms expected U.S. automakers to report total sales of nearly 16 million vehicles in 2024, which would mark the industry’s best year since selling roughly 17 million units in 2019.
Several other automakers on Friday such as Toyota Motor, Hyundai Motor, and Honda Motor reported single-digit annual sales increases, also largely in line with industry expectations. GM remained the country’s top-selling automaker, followed by Toyota and then Ford. GM reported 2024 sales of more than 2.7 million vehicles, up 4.3% from a year earlier. The automaker sold 2.9 million units in 2019. GM said sales were driven by increases in all four of its U.S. brands as well as a roughly 50% rise in sales of electric vehicles to more than 114,400 units. Despite the notable jump in EV sales, the vehicles only made up 4.2% of the automaker’s overall sales. GM estimated it achieved a 12% EV market share in the U.S. during the fourth quarter.3
4. Biden Team Offers Nuclear Path to Hydrogen Tax Credit
The Biden administration said on Friday portions of nuclear power plants will be able to secure tax credits to produce clean hydrogen if the credits help to prevent reactors from retiring. The new rules address one of the last and most contentious issues related to the Inflation Reduction Act, a 2022 law that is intended to fight climate change by subsidizing technologies that curb greenhouse gas emissions.
Some environmental groups say energy sources such as nuclear reactors should not qualify for the IRA’s clean hydrogen program and that using nuclear plants to produce hydrogen removes clean energy from the grid that could have been used by other electricity consumers. Industry analysts say clean hydrogen, or hydrogen produced from non-fossil energy sources, is needed to decarbonize heavy industry and some vehicles. The Treasury adjusted a draft plan from 2023 to allow nuclear power and other industries, such as natural gas to use carbon capture to prevent the release of emissions, to qualify for billions of dollars worth of credits to make hydrogen.4
Sources:
(1) www.wsj.com
(2) www.bloomberg.com
(3) www.cnbc.com
(4) www.reuters.com
All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
Bonds are subject to market and interest rate risk if sold prior to maturity. Bond and bond mutual fund values and yields will decline as interest rates rise, and bonds are subject to availability and change in price.
Investing in stock includes numerous specific risks, including the fluctuation of dividends, loss of principal, and potential illiquidity of the investment in a falling market.
Investing in foreign and emerging market securities involves special additional risks. These risks include but are not limited to currency risk, geopolitical risk, and risk associated with varying accounting standards. Investing in emerging markets may accentuate these risks.
Investment advice offered through Private Advisor Group, a registered investment advisor and separate entity from The Legacy Foundation.
This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.
The Legacy Foundation and LPL Financial do not offer tax advice.
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