Weekly Market Commentary | January 6th, 2025

by | Jan 6, 2025 | Market Commentary

Weekly Market Commentary | January 6th, 2025

Week in Review…

Major U.S. equity indices were mostly lower this week after finishing 2024 with double-digit annual gains. For the week ending January 3, 2025:

  • The S&P 500 closed down -0.48
  • The Dow Jones Industrial Average declined by -0.60%
  • The tech-heavy Nasdaq fell -0.51%
  • The 10-Year Treasury yield concluded at 4.59%

Initial jobless claims fell to an eight-month low of 211,000 in the week ending December 28, 2024, down from 219,000 in the previous week. This decrease, along with a drop in continuing claims to 1.84 million, suggests a resilient labor market.

The National Association of REALTORS® reported that pending home sales rose by 2.2% in November 2024, marking the fourth consecutive month of increases. This growth, exceeding the forecast of 0.9%, indicates a potential rebound in the housing market. Year-over-year, pending home sales increased by 6.9%, with improvements across all four U.S. regions.

The Institute for Supply Management (ISM) reported a Manufacturing Purchasing Managers Index (PMI) of 49.3, which was slightly higher than the previous reading but still indicating contraction. The S&P Global Manufacturing PMI for December 2024 came in at 49.4, surpassing expectations but below the prior reading.

The Atlanta Fed’s GDPNow model estimates fourth-quarter 2024 real GDP growth at 2.4%, a slight decrease from its previous projection of 2.6% on January 2, 2025.

Spotlight

A Resilient 2024 – In the Rear View Mirror

Equity markets performed strongly in 2024, driven by economic growth and solid corporate earnings, particularly in the technology sector. Fixed income saw modest gains, with leveraged loans, high-yield bonds, and asset-backed securities demonstrating strong performance against the backdrop of a robust economy. Inflation remained a persistent concern throughout 2024. The Federal Reserve cut interest rates three times, shifting to a more accommodative stance to support economic stability amid cooling inflation.

Economic Highlights

Inflation remained a persistent concern in 2024, with U.S. headline inflation at 2.7% in November, above the Fed’s 2% target. In response, the Federal Reserve implemented three 25 basis point rate cuts, bringing the federal funds rate to 4.25%-4.5% by December, while projecting only two rate cuts for 2025.

The 10-year Treasury yield, a key economic indicator, fluctuated throughout 2024, starting below 3.9% and ending at 4.57%. Geopolitical tensions in Israel and Ukraine had a modest impact on capital markets, contributing to the dollar’s safe-haven status and influencing investor sentiment.

The U.S. dollar showed strength in early 2025, continuing its robust performance from 2024. Its strength was also partly attributed to the Fed’s stance, interest rate differentials, and expectations surrounding President-elect Trump’s pro-growth policies. Despite these challenges, the U.S. economy demonstrated resilience, with GDP growth reaching 3.1% in the third quarter of 2024.

Broad Asset Class Performance

In 2024, Gold, Large Cap Core equities, and Global Equities emerged as top performers. U.S. Bonds underperformed, while Commodities, represented by the S&P GSCI, rallied in the fourth quarter. This rally was driven by gains in industrial metals, gold, and various agricultural commodities. U.S. real estate investment trusts (REITs) lagged behind the broader market in the last quarter of the year.

Equity Markets

Broad Equity Markets

For 2024 and Q4 2024, Growth outperformed Core and Value, while U.S. Equities (represented by the Russell 3000) outperformed International Equities and Emerging Markets and (represented by MSCI EM and MSCI EAFE) on a Total Return basis (24.51% versus 7.50% versus 3.82%).

This outperformance was driven by the continued dominance of large tech companies, higher liquidity in the U.S. market, and faster earnings growth of U.S. companies compared to global counterparts. Notably, in Q4 2024, Mid Cap Growth (represented by Russell Mid Cap Growth) outperformed both Large Cap Growth and Small Cap Growth (8.14% versus 7.07% versus 1.70%).

S&P Equity Sectors

Communication Services, Financial Services, and Consumer Discretionary sectors emerged as the top performers for both the full year and the fourth quarter of 2024. The Communication Services sector delivered an impressive ~34% gain on a total return basis in 2024, significantly outpacing other sectors, primarily driven by strong investor interest in mega-cap tech companies and the advancements in artificial intelligence (AI) technologies. However, the Technology sector continues to outperform the other equity sectors on a trailing 5-year total return basis.

Fixed Income 

Yield Curve and Corporate Spreads

The U.S. Treasury yield curve was deeply inverted at the start of 2024 with short-term rates exceeding long-term rates. However, as the year progressed and towards the year end, the yield curve began to normalize slightly as long-term yields increased relative to short-term yields. This shift reflected market expectations for a more supportive monetary policy environment and reduced recession concerns.

Corporate credit spreads across all segments—including high yield bonds, investment-grade bonds, and leveraged loans—remained relatively stable throughout the fourth quarter of 2024. However, these spreads tightened significantly over the trailing 12-month period. This compression was due to improved risk appetite, expectations of continued economic growth, and anticipation of a supportive monetary policy environment.

 

Fixed Income Sectors

In 2024 and Q4 2024, leveraged loans, high-yield bonds, and asset-backed securities demonstrated strong performance, as reflected by their respective indices. The Morningstar Leveraged Loan LSTA TR index returned 8.95%, outpacing the Barclays US High Yield Very Liquid index at 7.66% and the ICE BofA ABS TR index at 5.93%. The strong performance of these riskier fixed-income assets can be attributed to factors such as expectations of Fed rate cuts, improving economic outlook, and investors’ search for yield in a changing rate environment. 

 

Week Ahead…

Next week, employment data will be a key focus for investors. Several crucial economic reports will be released, providing insights into the labor market. On Tuesday, the Job Openings and Labor Turnover Survey (JOLTS) report will be released, followed by the ADP Nonfarm Employment Change report on Wednesday and Initial Jobless Claims on Thursday. However, Friday will be the most data-rich day, with the release of December’s figures for Average Hourly Earnings, Bureau of Labor Statistics Nonfarm Payrolls, Unemployment Rate, U6 Unemployment, and Participation Rate. It’s worth noting that initial jobless claims ended last year on a positive note, beating estimates for three consecutive weeks. Additionally, last month saw a divergence between ADP data and Nonfarm Payrolls, markets will monitor whether this discrepancy will persist.

On Friday, the University of Michigan will release four key consumer sentiment reports. The first two focus on consumer inflation expectations over one and five years. One-year expectations have recently remained within a narrow range of 2.6% to 2.8%, while five-year expectations have fluctuated between 3.0% and 3.2%. Markets will closely watch these figures for any signs of a shift in inflation expectations. The remaining two reports measure consumer expectations and overall sentiment. As the backbone of the economy, consumer confidence is a crucial indicator of economic activity. A positive surprise in these reports would bode well for both current and future economic growth.

Early next week, markets will focus on the service sector with the release of the S&P Global and ISM Services PMIs on Monday and Tuesday. As the U.S. economy is heavily reliant on services, these surveys will provide crucial insights into the health of the broader economy. A strong reading will likely boost confidence and support asset prices, while a weaker reading could raise concerns about economic growth.

This content was developed by Cambridge from sources believed to be reliable. This content is provided for informational purposes only and should not be construed or acted upon as individualized investment advice. It should not be considered a recommendation or solicitation. Information is subject to change. Any forward-looking statements are based on assumptions, may not materialize, and are subject to revision without notice. The information in this material is not intended as tax or legal advice.

Investing involves risk. Depending on the different types of investments there may be varying degrees of risk. Socially responsible investing does not guarantee any amount of success. Clients and prospective clients should be prepared to bear investment loss including loss of original principal. Indices mentioned are unmanaged and cannot be invested into directly. Past performance is not a guarantee of future results.

The Dow Jones Industrial Average (DJIA) is a price-weighted index composed of 30 widely traded blue-chip U.S. common stocks. The S&P 500 is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy. The NASDAQ Composite Index is a market-value weighted index of all common stocks listed on the NASDAQ stock exchange.

Market Commentary | December 30th, 2024

by | Dec 30, 2024 | Market Commentary

Market Commentary | December 30th, 2024

Week in Review…

Major U.S. equity indices demonstrated mild gains for the week, primarily influenced by the Federal Reserve’s announcement of fewer anticipated interest rate cuts for 2025. This revelation heightened investor caution amidst persistent market volatility. For the week ending December 27, 2024:

  • The S&P 500 closed at +0.67%
  • The Dow Jones Industrial Average gained +0.35%
  • The tech-heavy Nasdaq rose +0.76%
  • The 10-Year Treasury yield concluded at 4.62%

Given the holiday on Wednesday and a half day on Tuesday, the markets were not as packed with earnings reports and economic data. However, there were several key reports released last week that should give the markets plenty to analyze. The week saw a mixed bag of news for several key sectors.

  • Real estate demand appears solid, though perhaps not as red-hot as initial forecasts suggested. November’s building permits data was revised downward, yet it still significantly outpaced original projections, indicating strong builder confidence. Month-over-month new home sales rebounded with a 5.9% increase, confirming that last month’s hurricane-disrupted figures were an outlier. The actual number of new home sales was a slight miss, but still in line with expectations. Overall, housing demand is in line with expectations, albeit slightly less amazing than originally stated. 
  • In contrast, manufacturing demand appears sluggish. Both headline and core durable goods orders fell short of expectations. Core Durable Goods Orders, a preferred metric excluding volatile aircraft orders, came in at -0.1% versus the projected 0.3%. This suggests manufacturers may be cautious about future demand and less inclined to make large purchases.
  • Consumers sent mixed signals this week. On Monday, the Conference Board’s consumer confidence report was significantly weaker than expected, raising concerns about economic activity. However, Friday’s data showed a sharp decline in crude oil inventories (4.237 million barrels versus a forecast of 0.700 million), suggesting continued strong demand for discretionary items like travel. This report capped a month where crude oil inventories exceeded expectations four out of five weeks. The market now faces the challenge of reconciling these conflicting surveys and hard data points.
  • Recent Treasury auctions underscore a trend of rising yields across maturities. Last week’s auctions of the 2-, 5-, and 7-year Notes saw yields increase notably compared to November: 2-year yields rose 6.1 basis points (bps), 5-year yields climbed 28.1 bps, and 7-year yields surged 34.9 bps. This pattern suggests a bear steepening of the yield curve, implying the market anticipates continued economic growth alongside inflation. However, given recent periods of high inflation, it is uncertain how much inflation the market will tolerate. The Federal Reserve will need to carefully navigate its communication to manage expectations.

Spotlight

The Santa Rally of 2024: A Year-end Market Phenomenon

As the year draws to a close, investors and traders alike turn their attention to a well-known market phenomenon: the Santa Claus Rally. This term, coined by Yale Hirsch in 1972, refers to the tendency for stock markets to rise during the last five trading days of December and the first two trading days of January. The Santa Rally is often seen as a period of optimism and positive sentiment, and 2024 has been no exception.

Historical Context and Significance

Historically, the Santa Claus Rally has been a reliable, albeit modest, period of gains for the stock market. According to the Stock Trader’s Almanac, the S&P 500 has averaged a 1.3% gain during this seven-day trading window since 1969. This period is often characterized by lower trading volumes, as many institutional investors take time off, which can reduce resistance to upward price movements. Additionally, retail investors, buoyed by holiday bonuses and end-of-year optimism, often drive additional buying.

 

The 2024 Santa Rally

The 2024 Santa Rally kicked off on December 24 and will run through January 2. This year, the rally has been particularly anticipated due to a volatile December, where major indices experienced significant fluctuations. Recent trading sessions have shown positive movements, driven by a resurgence in tech stocks and overall market optimism.

Factors Which May Be Driving the Rally in 2024

Several factors contribute to the Santa Claus Rally. One key driver is investor sentiment. The holiday season often brings a wave of positive sentiment, as investors look forward to the new year with optimism. Additionally, tax considerations play a role, as investors may engage in tax-loss harvesting or repositioning their portfolios ahead of the new year.

Another factor is the lower trading volumes during the holiday season. With many institutional investors on vacation, there is less resistance to upward price movements, allowing for more significant gains. Retail investors, who are more active during this period, often contribute to the rally by making year-end purchases.

Looking Ahead

While the Santa Claus Rally is a well-documented phenomenon, it is not guaranteed. Broader economic events, geopolitical tensions, or bearish sentiment can easily disrupt the rally. However, the historical consistency of this trend makes it a point of interest for traders and investors.

As we move into the final days of 2024 and the first days of 2025, all eyes will be on the markets to see if the Santa Claus Rally will deliver its usual cheer. Whether you’re a seasoned investor or a market newcomer, understanding the dynamics of this period can provide valuable insights into market behavior and help inform your trading strategies.

Week Ahead…

The final week of 2024 and the start of 2025 are expected to have very few economic data releases. The key focus will be the ISM Manufacturing Purchasing Managers’ Index (PMI), which forecasters expect to remain below the 50 threshold, signaling continued contraction in manufacturing. This marks the ninth consecutive month of contraction, reflecting persistently soft demand. However, there are signs that the decline is moderating as companies shift their focus to planning for 2025.

Looking back on the year, against a backdrop of uncertainty, the U.S. economy has so far managed a remarkable soft landing. Despite initial concerns, the economy avoided a recession, with unemployment remaining low, albeit showing signs of weakening toward year-end, and inflation moderated significantly. The Federal Reserve’s approach to monetary policy played a crucial role. Contrary to market expectations of six rate cuts at the beginning of the year, the Fed delivered only three. Despite this restrained easing, the economy and markets adjusted well, with the S&P 500 surging nearly 30% year-to-date as of late December.

Market participants are approaching 2025 with a more tempered outlook. While optimism remains, for 2025 projections from major institutions like Morgan Stanley and Goldman Sachs suggest the S&P 500 could climb to 6500—still a solid gain from current levels, but reflective of moderated growth expectations.

In addition, the Federal Reserve’s latest economic projections also signal cautious optimism. Most officials foresee a 2% GDP growth rate, a slightly softer labor market, and fewer rate cuts than previously anticipated.

While future market performance cannot be predicted with certainty, the sentiment appears to favor a return to more measured growth in 2025.

As we bid farewell to a volatile 2024, we wish everyone a prosperous and fulfilling new year.

This content was developed by Cambridge from sources believed to be reliable. This content is provided for informational purposes only and should not be construed or acted upon as individualized investment advice. It should not be considered a recommendation or solicitation. Information is subject to change. Any forward-looking statements are based on assumptions, may not materialize, and are subject to revision without notice. The information in this material is not intended as tax or legal advice.

Investing involves risk. Depending on the different types of investments there may be varying degrees of risk. Socially responsible investing does not guarantee any amount of success. Clients and prospective clients should be prepared to bear investment loss including loss of original principal. Indices mentioned are unmanaged and cannot be invested into directly. Past performance is not a guarantee of future results.

The Dow Jones Industrial Average (DJIA) is a price-weighted index composed of 30 widely traded blue-chip U.S. common stocks. The S&P 500 is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy. The NASDAQ Composite Index is a market-value weighted index of all common stocks listed on the NASDAQ stock exchange.

Market Commentary | December 23rd, 2024

by | Dec 24, 2024 | Market Commentary

Market Commentary | December 23rd, 2024

Week in Review…

Major U.S. equity indices declined for the week, driven by the Federal Reserve’s announcement of fewer interest rate cuts in 2025 than previously anticipated. This news heightened investor caution amid ongoing market volatility.

For the week ending December 20, 2024:

  • The S&P 500 was down -1.99%
  • The Dow Jones Industrial Average was down -2.25%
  • The tech-heavy Nasdaq was down -2.25%
  • The 10-Year Treasury yield ended the week at 4.53%

The Federal Reserve’s recent monetary policy decision and a series of economic indicators have painted a complex picture of the U.S. economy as 2024 draws to a close. The central bank announced its third consecutive rate cut of the year, lowering the federal funds rate by 25 basis points to a range of 4.25% to 4.5%. This decision came despite higher-than-anticipated inflation data, with the Consumer Price Index (CPI) rising 0.3% in November. The market’s relatively calm reaction suggests that inflation concerns may be taking a backseat to other economic factors.

The labor market continues to show resilience, but subtle signs of weakening have emerged, becoming a more critical factor in shaping market expectations for future monetary policy decisions. Initial jobless claims decreased to 220,000 from 229,000, while continuing claims saw a slight decline from 1,890,000 to 1,874,000, indicating a still-robust job market with some signs of moderation.

Economic indicators released in the lead-up to the Fed meeting provided a mixed outlook across various sectors. The Purchasing Managers’ Index (PMI) data revealed a slight contraction in manufacturing activity with a reading of 48.3. The housing market showed divergent trends, with building permits rising by 6.1% while housing starts fell by 1.8%. Third-quarter gross domestic product (GDP) figures were revised upward to a 3.1% annual growth rate, reflecting stronger consumer spending and exports. However, the Philadelphia Fed Index’s significant decline to -16.4 pointed to contraction in regional manufacturing activity. On a positive note, existing home sales reached a six-month high, increasing 4.8% from October.

The Personal Consumption Expenditures (PCE) data, the Federal Reserve’s preferred inflation measure, showed a 2.4% annual increase, slightly below expectations. Separately, the Conference Board Leading Economic Index® (LEI) for the U.S. increased by 0.3% in November 2024, marking its first rise since February 2022. This positive sign for future economic activity was supported by improvements in building permits, equity markets, and manufacturing hours worked, as well as fewer initial unemployment claims.

The aforementioned array of economic indicators will play a crucial role in shaping market perspectives on economic growth, inflation trends, and the Federal Reserve’s policy trajectory as we move into 2025.

The Fed’s updated projections now anticipate fewer rate cuts in the coming year, with only two reductions totaling 50 basis points expected in 2025, down from the full percentage point of cuts projected in the previous quarter.

Spotlight

The Unexpected Winner in Commercial Real Estate – Retail 

The Federal Reserve implemented a series of 11 interest rate hikes at an unprecedented pace between March 2022 and mid-2024 to combat inflation, resulting in a cumulative increase of 525 basis points in the Fed Funds rate. This aggressive monetary tightening significantly impacted Commercial Real Estate (CRE) performance. However, contrary to expectations, the retail sector emerged as a surprising bright spot for investors. According to the NCREIF Property Index (NPI), the benchmark for private institutional CRE performance, retail was the only core sector to deliver positive returns over the year leading up to the third quarter of 2024.

 

Before examining the reasons behind retail outperformance, it’s important to note that the NCREIF Property Index (NPI) typically responds with a lag due to its reliance on appraisals. Additionally, retail space performance can vary significantly across property subtypes such as malls, strip centers, and street-front locations.

The perception and demand for brick-and-mortar retail has markedly improved since the early 2010s. During that period, the retail sector faced significant challenges:

  • High-profile bankruptcies in the aftermath of the Global Financial Crisis (GFC)
  • Fears of e-commerce dominating the retail industry
  • An oversupply of retail space

These factors contributed to substantial negative investor sentiment towards retail properties, leading to the widespread use of the term “retail apocalypse” to describe the market environment. However, recent years have seen a revitalization of physical stores, driven by:

  • The COVID-19 pandemic
  • The rise of hybrid shopping methods, such as “buy online, pickup in-store” (BOPIS)

Physical stores have evolved to become central hubs for goods distribution and revenue diversification for digital brands, reaffirming the demand for brick-and-mortar retail.

On the supply side, the fear of a “retail apocalypse” led to a significant decrease in retail space development after the GFC. According to Greenstreet:

  • From 2001 to 2008, new supply averaged approximately 2.5% of the total stock annually
  • In the following decade, new supply dropped to only about 0.5% of the existing stock per year

This lack of new supply, combined with strong retailer demand, has created a favorable market environment. As a result:

  • Occupancy rates for retail properties are now at their highest levels ever recorded
  • A backlog of leases is poised to drive strong Net Operating Income (NOI) growth
  • Retailers are quickly re-tenanting spaces from bankrupt tenants, minimizing disruption for landlords

These factors collectively contribute to the current outperformance of the retail sector in the commercial real estate market.

Exhibit: Retail space is at the tightest level ever with minimal supply over the past decade

Retailers previously focused on mall-based models are now closing their traditional stores to explore expansion opportunities in newer open-air retail spaces. Given the strong economic climate and robust consumer spending, neighborhoods, community, and strip centers are likely to experience continued high demand. In contrast, traditional malls are expected to face ongoing performance challenges and softening demand.

Week Ahead…

Next week marks the arrival of the holiday season, with Christmas Eve and Christmas Day occurring in the middle of the week. As a result, financial markets are likely to take a pause. While the bulk of earnings reports are coming to an end, investors should still pay close attention to several important economic indicators, especially those related to consumer demand.

On Tuesday, December 24, key economic data will be released that will shed light on consumer spending trends. The Durable Goods Orders report, which tracks changes in orders for long-lasting goods, will act as a vital gauge of consumer confidence and economic vitality. A strong report typically reflects robust consumer sentiment and a healthy economy.

Additionally, revised building permit data will be published on the same day. Market participants will be keen to see if the initial upward revision holds steady. New home sales figures will also be closely watched, as they are essential indicators of consumer demand and economic activity. This report is particularly noteworthy since it is expected to be less influenced by earlier hurricanes, thereby providing a clearer picture of consumer behavior. Moreover, with stable 30-year mortgage rates, fluctuations in interest rates are unlikely to significantly impact housing demand.

On Monday, December 23, the Conference Board will unveil its Consumer Confidence report. This survey-based data on consumer sentiment, when analyzed alongside hard data on durable goods and housing sales, can provide a thorough understanding of the current consumer landscape. The state of consumer spending will be an important metric as we transition into the new year, offering insights into potential economic trends for 2025.

This content was developed by Cambridge from sources believed to be reliable. This content is provided for informational purposes only and should not be construed or acted upon as individualized investment advice. It should not be considered a recommendation or solicitation. Information is subject to change. Any forward-looking statements are based on assumptions, may not materialize, and are subject to revision without notice. The information in this material is not intended as tax or legal advice.

Investing involves risk. Depending on the different types of investments there may be varying degrees of risk. Socially responsible investing does not guarantee any amount of success. Clients and prospective clients should be prepared to bear investment loss including loss of original principal. Indices mentioned are unmanaged and cannot be invested into directly. Past performance is not a guarantee of future results.

The Dow Jones Industrial Average (DJIA) is a price-weighted index composed of 30 widely traded blue-chip U.S. common stocks. The S&P 500 is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy. The NASDAQ Composite Index is a market-value weighted index of all common stocks listed on the NASDAQ stock exchange.

Weekly Market Commentary | December 16th, 2024

by | Dec 16, 2024 | Market Commentary

Weekly Market Commentary | December 16th, 2024

Week in Review…

Major U.S. equity indices showed mixed performance for the week, with notable divergence among the indexes.

  • The S&P 500 down -0.64%
  • The Dow Jones Industrial Average was down -1.82%
  • The tech-heavy Nasdaq finished up +0.34%
  • The 10-Year Treasury yield ended the week at 4.396%

The biggest market news last week was the release of November’s Consumer Price Index (CPI) data on Wednesday. While both headline and core CPI met month-over-month expectations, some market participants noted that headline inflation was slightly higher than the previous month (2.7% versus 2.6%). This marked the second consecutive month of year-over-year inflation increases. Market reaction was relatively muted, with the S&P 500 initially rising on Wednesday morning following the news, but it has since retreated.

While markets have expressed concern about rising inflation in recent months, this concern seems to be uneven. On Wednesday, the 10-year notes yield traded was lower than the month prior, suggesting that investors expect lower inflation in the future. This is despite short-term inflation remaining persistent. Long-term bondholders appear confident that the Federal Reserve will eventually achieve its 2% inflation target.

Last week brought important labor reports. Tuesday’s Nonfarm Productivity report met expectations at 2.2%, while Unit Labor Costs came in significantly lower than projected, at 0.8% instead of 1.9%. These reports suggest that future inflationary pressures from labor costs may be easing. However, Thursday’s reports hinted at potential labor market softening. Initial jobless claims were notably higher than expected, and continuing claims also rose slightly. These figures suggest some weaknesses emerging in the labor market. Investors will closely monitor future reports.

Spotlight

Santa Claus Rally

As the year ends, investors and financial media focus on the Santa Claus Rally, a seasonal rise in stock prices that has intrigued market watchers for decades. This article examines the data to determine whether this holiday trend leads to genuine, sustainable gains or if it’s merely a myth.

Historical Perspective

Yale Hirsch coined the term “Santa Claus Rally” in 1972, referring to the stock market’s tendency to rise during the last five trading days of December and the first two of January. Since 1950, this seven-day period has yielded positive returns for the S&P 500 about 80% of the time, with an average gain of 1.4%1. Surprisingly, the largest Santa Claus Rally occurred in 2008 during the Great Financial Crisis, with the S&P 500 surging 7.4%. Despite a difficult first quarter in 2009, the S&P 500 ended that year up 23%2.

Why It May Matter

Investors are drawn to the Santa Claus rally for potential profits during a brief, specific period. More specifically, inferences from Table 1 confirm that this phenomenon may not be random:

  • Returns during the Santa Claus Rally significantly differ from other trading days
  • Average returns during this period are higher than non-holiday trading days

Additionally, the probability of positive returns is higher during the Santa Claus Rally compared to other trading days.

1 Dolan, Brian. “Santa Claus Rally: What It Is and Means for Investors.” Investopedia, December 15, 2023. Accessed December 12, 2024. https://www.investopedia.com/terms/s/santaclauseffect.asp#:~:text=A%20Santa%20Claus%20rally%20is,3

2 Bowman, Jeremy. “The Biggest Santa Claus Rally in History — What It Could Mean for Today.” The Motley Fool, December 24, 2023. https://www.fool.com/investing/2023/12/24/biggest-santa-claus-rally-history-what-could-mean/.

The significance of the difference between ADR Dec. &Jan. (and ADR: Dec) and ADR: Non-holiday at p<0.01.

Table 2 below expands upon this idea of higher expected returns and looks at how probable it is for a particular trading day to be positive.

Source: Journal of Financial Planning: March 20153

Inferences Published by Journal of Financial Planning

Based on empirical research published by Journal of Financial Planning in March 2015, investors experience higher returns and a greater probability of positive outcomes during the Santa Claus Rally compared to any other time of the year. The research revealed that investors generally view the Santa Claus Rally as a potential leading indicator for the following year’s market performance:

  • Since 1994, it had accurately predicted the S&P 500’s direction in 22 out of 29 years, with the rally period’s gains or losses often preceding similar trends in the subsequent year
  • However, the inclusion of January’s first two trading days in the rally definition, as established by Yale Hirsch in 1972, can create overlap with other indicators like the January Effect, potentially reducing its effectiveness

Potential Challenges

Capitalizing on the Santa Claus Rally presents challenges. While a broad market index allocation might yield attractive returns, identifying specific sectors or companies that could benefit the most may be challenging. For long-term investors, adjusting portfolios to exploit this short-term trend may be impractical and potentially costly. The opportunity cost of deviating from long-term allocations often outweighs potential gains from such seasonal fluctuations.

The Santa Claus Rally has shown mixed results in the post-Covid era from 2020 through 2024:

  • 2020-2021: The market experienced a Santa Claus Rally, with the S&P 500 gaining during the traditional rally period
  • 2021-2022: There was a Santa Claus Rally at the end of 2021, but 2022 was a challenging year for stocks, with the S&P 500 ending down approximately 18%
  • 2022-2023: The Santa Claus Rally did not occur, breaking a seven-year streak of year-end rallies
  • 2023-2024: Despite the absence of a Santa Claus Rally the previous year, the stock market significantly outperformed in 2024. The S&P 500 rose by roughly 28% through the first week of December, while the Dow Jones Industrial Average increased by about 19%, and the Nasdaq gained nearly 35%.

3 Financial Planning Association. “Yes, Virginia, There Is a Santa Claus Rally: Statistical Evidence Supports Higher Returns Globally,”

While the Santa Claus Rally may be more than a myth, the costs of exploiting this market trend may outweigh its benefits for most investors.

Week Ahead…

Next week, investors will undoubtedly focus on the Federal Reserve’s upcoming decision regarding interest rates. Despite higher-than-expected inflation data released this week, markets remained relatively calm, suggesting that inflation may no longer dominate investor concerns. While the decline in inflation has stalled, it appears unlikely to deter the Fed from proceeding with its anticipated 25-basis-point (bps) rate cut at its December meeting next Wednesday. Instead, the slowdown in the job market has emerged as a more critical factor shaping market expectations for monetary policy decisions. Futures markets, as tracked by the CME Group, are pricing in a 95% probability of 25 bps cut.

Before the Fed meeting, investors will also turn their attention to the Purchasing Managers’ Index (PMI) data. This report, set for release early in the week, provides a snapshot of business activity across the manufacturing and services sectors. However, unless the PMI shows a significant and unexpected increase, it is unlikely to shift the prevailing market outlook or the Fed’s course of action.

Housing starts and building permits will be out on Wednesday before the Fed. Initial jobless claims, Philadelphia Fed Index, final and existing home sales will be published on Thursday. Also, the markets will digest the third-quarter gross domestic product (GDP) numbers on Thursday. These figures will shed light on the strength of the U.S. economy heading into year-end and could influence investor sentiment. A stronger-than-expected GDP reading might raise concerns about the potential for prolonged monetary tightening, while a weaker reading could reinforce expectations of further rate cuts in 2025. On Friday, we will receive the Personal Consumption Expenditures (PCE) data, which is the Federal Reserve’s preferred inflation measure. It will be interesting to observe how the market reacts to any changes in the PCE, especially considering the subdued response to last week’s CPI report. Together, these events will shape the market’s outlook on economic growth, inflation trends, and the Fed’s policy trajectory as the year comes to a close.

This content was developed by Cambridge from sources believed to be reliable. This content is provided for informational purposes only and should not be construed or acted upon as individualized investment advice. It should not be considered a recommendation or solicitation. Information is subject to change. Any forward-looking statements are based on assumptions, may not materialize, and are subject to revision without notice. The information in this material is not intended as tax or legal advice.

Investing involves risk. Depending on the different types of investments there may be varying degrees of risk. Socially responsible investing does not guarantee any amount of success. Clients and prospective clients should be prepared to bear investment loss including loss of original principal. Indices mentioned are unmanaged and cannot be invested into directly. Past performance is not a guarantee of future results.

The Dow Jones Industrial Average (DJIA) is a price-weighted index composed of 30 widely traded blue-chip U.S. common stocks. The S&P 500 is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy. The NASDAQ Composite Index is a market-value weighted index of all common stocks listed on the NASDAQ stock exchange. 

Market Commentary | December 9th, 2024

by | Dec 9, 2024 | Market Commentary

Market Commentary | December 9th, 2024

Week in Review…

The market extended its gains, with the S&P 500 and Nasdaq reaching new all-time highs after a solid week of economic data that boosted confidence that the economy remains on strong footing, and is not running too hot to deter the Federal Reserve (Fed) from lowering its rate in December.

  • The S&P 500 rose +0.71%
  • The Dow Jones Industrial Average was down -0.03%
  • The tech-heavy Nasdaq finished up +2.35%
  • The 10-Year Treasury yield ended the week at 4.149%

This week, key economic data revealed mixed signals about the U.S. economy. The Manufacturing Purchasing Managers’ Index (PMI) for November increased to 48.4 from October’s 46.5, exceeding expectations of 47.7. While still below the critical 50-point threshold, which separates contraction from expansion, the uptick suggests a slower pace of decline in manufacturing activity. Conversely, the ISM Services PMI fell to 52.1 from 56.0 in October, indicating the services sector continues to grow but at a reduced rate.

Labor market indicators were a focal point, with the Job Openings and Labor Turnover Survey (JOLTS) report surprising markets. October’s job openings rose to 7.7 million, up from 7.4 million in September, signaling persistent demand for labor despite higher interest rates. Initial jobless claims also pointed to labor market resilience, coming in at 224,000 for the week, which is in line with normal market level. In addition, the nonfarm payrolls report also surprised the market with it adding back 227,000 jobs in November, compared to 36,000 the month prior. The increase is largely due to workers sidelined by storms getting back on the job, and thousands of striking Boeing employees returned to work.

Federal Reserve Chair Jerome Powell’s comments this week emphasized the Fed’s data-driven approach to monetary policy. He highlighted that the current state of the economy is stronger than the Fed has projected, and it is too soon to say how policy changes from the new administration might reshape the outlook for economic activity and interest rates. The Fed’s next meeting is December 17-18. Investors in interest-rate futures markets are currently pricing in a roughly 80% chance of a 25 bps rate cut and 20% chance of no cut, according to the CME Group.

Spotlight

The Trump Effect on Factors

Since the election, equities have continued to rally higher as investors analyze the impact of a second Trump term. However, underneath the surface, there has been a shift in the types of companies that investors are betting on. This week, we take a look at how the market has adjusted their equity position within factors in both the Russell 1000 and Russell 2000.

The Russell 1000 shows a strong year-to-date (YTD) return of 28.08%. The Momentum factor outperforms with a YTD return of 33.64%, indicating that high-momentum stocks lead the gains, while the Volatility factor underperforms with a YTD return of 21.22%. For the quarter-to-date (QTD) period, the Momentum factor again outperforms with a 6.58% return, while the Volatility factor lags with a 3.20% return.

In November, the Size factor saw the highest gain at 9.38%, significantly outperforming the broad index’s 6.44% gain. This recent surge in the Size factor may be attributed to the impact of tariffs, which have made smaller large-cap stocks more attractive due to their lower exposure to international trade and supply chain disruptions. Meanwhile, the Yield factor has the lowest November return at 4.56%, highlighting the impact of higher rates on dividend stocks. The notable change in November, with the Size factor outperforming, contrasts with the broader trends observed over the past four years indicating a potential broad investor shift away from the larger names in the index.

The Russell 2000 shows a solid YTD return of 21.58%. The Momentum factor outperforms with a YTD return of 27.79%, indicating that high-momentum stocks lead the gains, while the Size factor underperforms with a YTD return of 17.51%. For the QTD period, the Quality factor outperforms with a 9.82% return, while the Value factor lags with an 8.27% return.

In November, the Quality factor saw the highest gain at 11.17%, slightly outperforming the broad index’s 10.97% gain. Meanwhile, the Yield factor has the lowest November return at 9.22%, a similar trend seen in large caps. The strong performance of the Momentum factor could be attributed to investors flocking into the asset class broadly post-election. The recent outperformance of the Quality factor may be due to investors rotating into small-cap stocks broadly post-election, driven by expectations of lower taxes, increased domestic production, and potential benefits from a U.S.-first policy.

Overall, we have seen a broad shift away from mega-cap stocks to small-to-medium size quality companies that are isolated from international trade and have the capacity to handle both higher rates and will benefit from lower taxes. If Trump’s proposed tariffs and economic policies come to reality in 2025, we could potentially continue to see small, quality companies outperform larger multi-nationals.

Week Ahead…

The headline event next week will be the release of the November Consumer Price Index (CPI) data. Core CPI, which excludes volatile food and energy prices, is closely watched by the Federal Reserve as a key indicator of underlying inflation. By focusing on this metric, policymakers can better gauge price pressures and make informed decisions about monetary policy.

Markets expect November’s Core CPI to align with October’s 0.3% increase. Any significant deviation from this forecast could cause market volatility as investors adjust their expectations for potential policy actions and economic outcomes.

Tuesday will bring two reports that will provide further insights into the labor market and its relationship with inflation.

  • Nonfarm Productivity measures the annualized change in labor efficiency. Higher productivity can lead to higher wages without fueling inflation. Given the recent strong job growth, increased efficiency could help alleviate inflationary pressures.
  • Unit Labor Costs measure the annualized change in labor costs for businesses. This is a leading indicator of consumer inflation. As such, the market will closely watch this report to gauge how recent job market strength will translate into price pressures.

Additionally, the 10-year Treasury note auction on Wednesday will be significant. The 10-year note plays a crucial role in pricing 30-year mortgages and long-term inflation expectations. Auction results will give markets an opportunity to see how recent economic data, particularly the strong job market, is being priced into the long end of the curve.

This content was developed by Cambridge from sources believed to be reliable. This content is provided for informational purposes only and should not be construed or acted upon as individualized investment advice. It should not be considered a recommendation or solicitation. Information is subject to change. Any forward-looking statements are based on assumptions, may not materialize, and are subject to revision without notice. The information in this material is not intended as tax or legal advice.

Investing involves risk. Depending on the different types of investments there may be varying degrees of risk. Socially responsible investing does not guarantee any amount of success. Clients and prospective clients should be prepared to bear investment loss including loss of original principal. Indices mentioned are unmanaged and cannot be invested into directly. Past performance is not a guarantee of future results.

The Dow Jones Industrial Average (DJIA) is a price-weighted index composed of 30 widely traded blue-chip U.S. common stocks. The S&P 500 is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy. The NASDAQ Composite Index is a market-value weighted index of all common stocks listed on the NASDAQ stock exchange.

Market Commentary | December 2nd, 2024

by | Dec 2, 2024 | Market Commentary

Market Commentary | December 2nd, 2024

Week in Review…

With markets closed on Thursday for the holiday and an early closure on Friday, the market still demonstrated positive momentum across the major indices:

  • The S&P 500 rose +1.06%
  • The Dow Jones Industrial Average was up +1.39%
  • The tech-heavy Nasdaq finished up +0.74%
  • The 10-Year Treasury yield ended the week at 4.178%

Housing Market Update: A Mixed Bag

Last week’s headlines were dominated by disappointing new home sales figures. Sales came in significantly below expectations, particularly in the South, likely impacted by hurricanes. However, building permits showed some strength, suggesting builders may be optimistic about future demand.

Interest Rate Dynamics

The U.S. Treasury auctioned 2-, 5-, and 7-year notes last week. Short-term yields rose, particularly the 2-year note, potentially signaling expectations of higher Fed Funds rates. In contrast, long-term rates declined, leading to a drop in 30-year mortgage rates. Markets are navigating a challenging environment with elevated short-term (gross domestic product) GDP and inflation. While the market anticipates the Fed will eventually achieve its 2% inflation target, the path to getting there may be less straightforward.

Inflation and GDP

Both core (personal consumption expenditures) PCE inflation and Q3 GDP were in line with expectations. While GDP remains strong, inflation persists at around 3%. This mixed picture highlights the challenge of balancing economic growth with price stability. Both GDP and inflation are key inputs for bond yield and market return forecasts. Strong GDP and persistent inflation at around 3% will challenge these forecasts.

Spotlight

Implications of the Upcoming Trade War in 2025

As we approach 2025, the prospect of a new trade war looms large, with significant implications for global markets and economies. Drawing insights from recent analyses by Charles Schwab and the International Monetary Fund (IMF), we can better understand the potential impacts and prepare for the challenges ahead.

Historically, trade wars have introduced volatility into the stock market. According to Charles Schwab, while the initial announcements of tariffs and trade restrictions often lead to sharp selloffs, markets tend to stabilize as the specifics of the trade policies become clearer. For instance, during the U.S.-China trade war, the S&P 500 experienced significant fluctuations, but eventually recovered as investors adjusted to the new trade environment.

The IMF’s World Economic Outlook highlights that the global growth outlook remains stable yet underwhelming, with growth projections for 2024 and 2025 at around 3.2%. However, the balance of risks is tilted to the downside, with rising protectionism and trade tensions posing significant threats.

Recent Inflation Developments

The proposed tariffs could have varied impacts across various sectors and regions, while different sectors will likely experience various impacts from the trade war. Industries heavily reliant on international supply chains, such as technology and manufacturing, may face increased costs and disruptions. Conversely, sectors less exposed to international trade, like utilities and consumer staples, might be more resilient. The IMF notes that sectors with high foreign sales exposure could see more pronounced effects, necessitating strategic adjustments by companies. Tariffs can lead to higher costs for imported goods, which may be passed on to consumers, potentially driving inflation. This inflationary pressure can squeeze corporate profit margins, particularly for companies that cannot easily pass on these costs. The IMF’s analysis suggests that while the overall impact on inflation might be contained, certain industries could see significant cost increases, affecting their earnings.

In the long term, markets often adapt to new trade realities. Companies may shift their supply chains, seek new markets, or innovate to mitigate the impact of tariffs. Historical data shows that despite initial disruptions, stock markets have shown resilience and the ability to recover over time. For example, during past trade tensions, firms with high international sales performed similarly to those with minimal foreign sales, indicating a capacity for adaptation.

MSCI World Constituents Performed Similar Despite Foreign Sales Exposure

To navigate the uncertainties of a trade war, investors should consider diversifying their portfolios and focusing on sectors less affected by international trade. On the other hand, the IMF emphasizes the need for a policy pivot to address the rising threats posed by trade tensions, which includes shifting gears on fiscal policy to ensure sustainable debt dynamics and rebuilding fiscal buffers to mitigate the adverse effects of trade tensions.

While the upcoming trade war in 2025 presents significant risks, understanding these potential impacts and preparing strategic responses can help investors and policymakers navigate and adapt to the challenges ahead.

Week Ahead…

The market will be active over the next week, with labor reports and economic sentiment indexes taking center stage. Investors will closely watch these key indicators for clues about the economy’s trajectory and potential year-end market volatility.

Labor Market Focus

The week provides an opportunity to assess the overall health of the job market. Jobs data has become increasingly important as the Federal Reserve resumes its dual mandate.

  • Tuesday’s Job Openings and Labor Turnover Survey (JOLTS) report will provide insights into labor demand and, by extension, economic demand
  • On Friday, the nonfarm payrolls report will be crucial, especially after October’s figures were skewed by hurricanes. Markets will closely watch this report.
  • Also on Friday, the unemployment rate will be released. It has remained at 4.1% for the past two reports, and a significant increase would be unwelcome.
  • Weekly jobless claims will continue to provide additional information about the job market

Markets will watch these reports closely as a strong job market could discourage the Fed from cutting interest rates.

Economic Sentiment Indexes

A couple of important market sentiment indexes will be released this week:

  • Monday’s ISM Manufacturing Purchasing Managers’ Index (PMI) will gauge whether the manufacturing sector will continue to drag on economic activity or start to participate in the upside
  • Wednesday’s ISM Non-Manufacturing PMI will be more important as economic activity is driven more by consumption and non-manufacturing sectors. The last three reports have beaten expectations, and markets hope this trend continues.

This content was developed by Cambridge from sources believed to be reliable. This content is provided for informational purposes only and should not be construed or acted upon as individualized investment advice. It should not be considered a recommendation or solicitation. Information is subject to change. Any forward-looking statements are based on assumptions, may not materialize, and are subject to revision without notice. The information in this material is not intended as tax or legal advice.

Investing involves risk. Depending on the different types of investments there may be varying degrees of risk. Socially responsible investing does not guarantee any amount of success. Clients and prospective clients should be prepared to bear investment loss including loss of original principal. Indices mentioned are unmanaged and cannot be invested into directly. Past performance is not a guarantee of future results.

The Dow Jones Industrial Average (DJIA) is a price-weighted index composed of 30 widely traded blue-chip U.S. common stocks. The S&P 500 is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy. The NASDAQ Composite Index is a market-value weighted index of all common stocks listed on the NASDAQ stock exchange.