Dear Friends,
Solid gains for stocks gave investors a November to remember. In fact, the S&P 500’s more than 5% advance marked its best month of 2024. Several factors played into the stock market’s continued move higher. The U.S. economy continued its steady run of solid growth. The Federal Reserve (Fed) cut interest rates as expected, providing some reassurance about the outlook for inflation. The third quarter earnings season was solid, revealing that corporate America still has double-digit earnings power in its bag of tricks. The combination of election clarity and prospects for deregulation and lower taxes from the incoming administration also played a role. Market leadership was also encouraging, as small caps and economically sensitive consumer discretionary and financial sectors led, which may bode well for further gains. Find out more about what is driving the markets in this week’s newsletter.
Economy, Geopolitics, and Commodities
1. US Hiring Rebounds, but Rising Unemployment Keeps Fed Cut Alive
US hiring picked up in November and the unemployment rate increased, pointing to a moderating labor market rather than one that’s significantly deteriorating. Nonfarm payrolls rose 227,000 last month following an upwardly revised 36,000 gain in October — a month constrained by storms and strikes — according to Bureau of Labor Statistics figures released Friday. Smoothing out volatility, payroll growth over the past three months averaged 173,000 — a step down from the robust pace seen earlier this year.
The unemployment rate, which edged higher to 4.2%, indicates cooling demand for workers, with long-term joblessness at the highest in almost three years. Traders interpreted it as confirming the case for another Federal Reserve interest rate cut when policymakers meet later this month. The figures, after accounting for payroll swings related to a Boeing Co. strike and hurricanes, support the Fed’s view that the job market remains solid yet no longer a big source of inflation. While price pressures have remained elevated in recent months, officials have begun reducing interest rates to give the economy a nudge and ensure hiring is sustained.2
2. U.S. Job Openings Increased in October
Job openings in the U.S. increased in October, bucking a trend of falling vacancies for most of the past two years. The number of openings on the last day of October was 7.7 million, up from a revised 7.4 million in September, the Labor Department said Tuesday in its latest job openings and labor turnover survey, or JOLTS. October hiring totaled 5.3 million, a reduction compared with 5.6 million in September. Layoffs declined to 1.6 million, versus 1.8 million a month earlier.
The Labor Department’s separate monthly employment report has shown solid job-creation figures—setting aside a weak October update that came amid autumn hurricanes and a major strike at Boeing—and a stable unemployment rate of 4.1%, no higher than it was in June. But JOLTS data has suggested the labor market is cooling. The number of openings has trended lower since mid-2022, and September’s reading was the weakest figure since January 2021.1
3. US Debt Ceiling to Over-Complicate Fed’s Balance-Sheet Runoff
The US debt ceiling is once again emerging as the Federal Reserve continues to unwind its balance sheet, putting the central bank in a tough spot — only this time it’s trickier. The debt limit will be reinstated on Jan. 2, prompting the Treasury Department to deploy a series of extraordinary measures that include spending down its cash pile and reducing the amount of T-bills it issues to preserve its borrowing capacity.
Because the Treasury’s cash balance, known as the Treasury General Account, or TGA, is one of the major liabilities on the Fed’s balance sheet, such measures will boost mainly bank reserves parked at the central bank and demand for the overnight reverse repurchase agreement facility, or RRP. That means markets will be flush with cash as the Fed continues shrinking its own balance sheet in a process known as quantitative tightening, or QT. Once Congress passes legislation to suspend or lift the debt ceiling, the Treasury will work quickly to rebuild its cash balance, a process that yanks cash out of the financial system. The shifting of money between markets and the government’s checking account risks masking signals that are critical for identifying any strains created by the central bank’s balance-sheet runoff. Minutes from the central bank’s November gathering showed staff briefed the committee about possible implications of the debt ceiling’s reinstatement.2
4. Japan’s Service Activity Perks Up as Demand Improves
Japan’s service activity swung back to growth in November as improving demand supported new business, a private sector survey showed on Wednesday. The final au Jibun Bank Service purchasing managers’ index (PMI) rose to 50.5 in November from 49.7 in October, according to the survey compiled by the S&P Global Market Intelligence. It was slightly higher than a flash reading of 50.2 and rose above the 50.0 threshold separating expansion from contraction.
New business expanded for the fifth straight month in November, reflecting improved confidence and business expansions, the survey found. Firms were optimistic about their business outlook with the index of the future activity rising to the highest since July. They see new business expansion plans and clients win increasing demand and customers; the survey showed. Employment rose at the fastest pace in four months while outstanding business hit the strongest growth in eight months, the survey found. Inflationary pressures remained strong in November due to higher costs of fuel, labor, and logistics. Companies passed price burdens on to clients, with the level of prices charged rising at the fastest pace in six months. The composite PMI, which combines manufacturing and service activity, grew to 50.1 in November from 49.6 in October. The PMIs come ahead of the Bank of Japan’s policy meeting on Dec. 18-19, with market players closely monitoring economic data.4
5. Eurozone Retail Trade Declines as Political Worries Mount
Retail trade in the eurozone fell in October for the first time since June, a sign of jitters among consumers despite accelerating wages and the economy expanding more than expected. The euro area’s volume of retail trade declined 0.5% in October, reversing the 0.5% rise of September statistics agency Eurostat said Thursday. Economists polled by The Wall Street Journal expected a softer 0.3% fall in October.
Retailers could continue to struggle in the months ahead, after the eurozone’s key consumer-confidence gauge edged down in November, having already been subdued since Russia’s full-scale invasion of Ukraine. Growing political uncertainty via domestic upheaval in Germany and France and overseas in the Middle East, as well as U.S. President-elect Donald Trump’s proposed tariffs, add to persistent concerns over the growth of the currency area’s economy. Retail sales in Europe’s largest economy, Germany, tumbled 1.4%, as threats of layoffs, particularly in its key auto sector, continued to rise. Among the 20 eurozone nations, only Belgium fared worse. The lack of retail spending chimes with data showing that Europeans are saving more than previously, and at a higher rate than in the U.S. retail and food-service sales rose 0.4% in October, according to the Commerce Department.1
Financial Markets
1. S&P 500 Rises to a Record Close Friday
The S&P 500 and Nasdaq Composite rose to fresh records on Friday after November jobs data came in slightly better than expected, but not so hot as to deter the Federal Reserve from cutting rates again later this month. The broad market S&P 500 climbed 0.25% to 6,090.27. Tech-heavy Nasdaq advanced 0.81% to 19,858.77, bolstered by gains in Tesla, Meta Platforms and Amazon. Both indexes touched new all-time highs during the session and closed at records. The Dow Jones Industrial Average slipped 123.19 points, or 0.28%, to close at 44,642.52.
Shares of Lululemon, DocuSign, and Ulta Beauty rallied after the companies raised their financial guidance. Bond yields fell. The benchmark 10-year yield edged lower to settle at 4.150%, from around 4.18% the day prior. Elsewhere, stocks were mixed. European stocks slipped, while Chinese indexes rose. Bitcoin prices hovered around $100,000 after reaching that milestone for the first time Wednesday.3
2. GM Expects More Than $5 Billion Impact from China Restructuring
General Motors expects a restructuring of its joint venture operations with SAIC Motor Corp in China to cost more than $5 billion in noncash charges and write-downs, the Detroit automaker disclosed in a federal filing Wednesday morning. GM said it expects to write down the value of its joint-venture operations in China by between $2.6 billion and $2.9 billion. It also anticipates another $2.7 billion in charges to restructure the business, including “plant closures and portfolio optimization,” according to the filing.
GM, which previously announced plans to restructure its operations in China, did not disclose any additional details about the expected closures. GM’s market share in China, including its joint ventures, has plummeted from roughly 15% as recently as 2015 to 8.6% last year — the first time it has dropped below 9% since 2003. GM’s equity income from the operations has also fallen, down 78.5% since peaking in 2014, according to regulatory filings. GM’s U.S.-based brands such as Buick and Chevrolet have seen sales drop more than its joint venture sales with SAIC Motor, Wuling Motors, and others. The joint venture models accounted for about 60% of its 2.1 million vehicles sold last year in China. Before this year, the only quarterly losses for GM in China since 2009 were a $167 million shortfall during the first quarter of 2020 due to the coronavirus pandemic and an $87 million loss during the second quarter of 2022. The Detroit automaker has reported three consecutive quarterly losses in equity income for its Chinese operations this year, totaling $347 million. That includes a loss of $137 million during the third quarter.3
3. Amazon Announces Supercomputer, New Server Powered by Homegrown AI Chips
Amazon’s cloud computing arm Amazon Web Services Tuesday announced plans for an “Ultracluster,” a massive AI supercomputer made up of hundreds of thousands of its homegrown Trainium chips, as well as a new server, the latest efforts by its AI chip design lab based in Austin, Texas. The chip cluster will be used by the AI startup Anthropic, in which the retail and cloud-computing giant recently invested an additional $4 billion. The cluster, called Project Rainier, will be located in the U.S. When ready in 2025, it will be one of the largest in the world for training AI models, according to Dave Brown, Amazon Web Services’ vice president of compute and networking services.
Amazon Web Services also announced a new server called Ultraserver, made up of 64 of its own interconnected chips, at its annual re: Invent conference in Las Vegas Tuesday. Additionally, AWS on Tuesday unveiled Apple as one of its newest chip customers. Combined, Tuesday’s announcements underscore AWS’s commitment to Trainium, the in-house-designed silicon the company is positioning as a viable alternative to the graphics processing units, or GPUs, sold by chip giant Nvidia. A key part of Amazon’s AI strategy is to update its custom silicon so that it can not only bring down the costs of AI for its business customers but also give the company more control over its supply chain. That could also make AWS less reliant on Nvidia, one of its closest partners, whose GPUs the company makes available for customers to rent on its cloud platform.1
4. Eli Lilly to Expand Facility to Meet Demand for Diabetes, Obesity Treatments
Eli Lilly said it would invest $3 billion to expand a recently acquired manufacturing facility to meet growing demand for its diabetes and weight-loss medicines. The drugmaker said the Kenosha County, WI, plant expansion would extend the reach of its injectable-product manufacturing and add 750 jobs. The facility already employs around 100 people. Overall, the expanded facility would focus on manufacturing injectable medicines, device assembly, and packaging for medicines across multiple therapeutic areas, the Indianapolis company said.
The announcement comes shortly after Lilly released a study that claimed that its Zepbound obesity drug is more effective than competitor Novo Nordisk’s Wegovy. Results of a randomized clinical trial of more than 750 participants showed people taking Zepbound lost about 20% of their body weight on average after 72 weeks in treatment, compared with almost a 14% loss for Wegovy patients. The decision to boost production follows months of shortages of these weight-loss treatments amid soaring demand. Both Lilly and Novo Nordisk have expanded their production capacity to resolve recent shortages. After resolving the supply issues, the companies have shifted focus to promoting the drugs to patients and doctors. Lilly is now stepping up direct-to-consumer advertising for its obesity drug, including new TV spots that compete with Wegovy ads for viewers’ attention.2
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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