5320 Northshore Drive,
North Little Rock, Arkansas 72118
contact@sowellmanagement.com
You should receive a confirmation email shortly. Don’t forget to reserve your room through the unique Sowell hotel reservation page. You can extend your stay at the Sowell Summit reduced room rate.
WEEK AHEAD
December 16-20, 2024
Last week’s modest market decline could not shake the well-anchored technical signals. Our tactical models remain balanced and fully invested.
Not even the momentum from President-elect Trump could outpace the forces of inflation and the Federal Reserve's influence this past week. The Consumer Price Index (CPI) ticked up by 0.1% to 2.7% year-over-year, while Producer Prices surged 0.4% in November, pushing the annual pace to a hotter-than-expected 3%. These inflationary pressures fueled heightened volatility in bond markets. Amid uncertainty over whether the Federal Reserve will cut rates this month, 10-year Treasury yields spiked over 25 basis points to 4.40%, briefly pulling the wind out of the sails for equities. The S&P 500 slipped 0.61%, while the Bloomberg U.S. Aggregate Bond Index shed 1.38%.
Inflation concerns weighed heavily on rate-sensitive sectors such as Utilities, Basic Materials, Financial Services, and Industrials, each dropping by more than 2% for the week. However, a silver lining emerged in housing and small business data. Weekly mortgage applications jumped 5.4%, and the National Federation of Independent Business (NFIB) Small Business Optimism Index surpassed expectations, climbing to 101.7.
Not all news was bleak for equities. The Communication Services sector outperformed, thanks to Alphabet's meteoric 8.8% rise following its announcement of Willow, a quantum computing chip capable of completing tasks in under five minutes that would otherwise take today's supercomputers an age of the universe to accomplish. While the broader implications of quantum computing remain to be seen, it underscores the transformative potential of emerging technologies.
Higher growth stocks also made notable contributions. Apple reclaimed its position as the most valuable publicly traded company, surpassing NVIDIA with a market capitalization of $3.75 trillion. Broadcom shares soared by 25% after reporting explosive demand for its custom AI chips, reinforcing the burgeoning opportunities in artificial intelligence. Eight S&P 500 constituents boast market caps exceeding $1 trillion, with three—Apple, Microsoft, and NVIDIA—now north of $3 trillion.
Looking ahead, investors will focus all their attention on the Federal Reserve's upcoming interest rate decision and the accompanying FOMC statement on December 18. The pivotal decision for the Fed to cut rates by 1/4 percent or hold interest rates is expected to set the tone for the market as it navigates the final weeks of 2024 and sentiment heading into 2025.
"With labor market conditions in rough balance and inflation expectations well anchored, I expect inflation to continue to come down toward our 2 percent objective, albeit on a sometimes-bumpy path." – Federal Reserve Chair Jerome Powell, Dallas Chamber of Commerce, November 14, 2024
Will the Fed Signal White or Black Smoke
With just one FOMC meeting to go before the end of the year, the question has become not how much the Fed will cut, but whether we get another reduction in its policy rate by December. US inflation is obviously a key data point influencing that decision, making last week's CPI report out of the Bureau of Labor Statistics (BLS) an important one for investors. For the doves, on the face of it, it wasn't a helpful one. Headline prices rose 2.7% year-over-year in November, higher than the 2.6% registered in October and the second increase in eight months.
Things didn't look much better, excluding volatile food and energy prices, with core CPI posting a 3.3% increase, matching its October figure—a rate stubbornly higher than the Fed's 2% target for inflation. Both headline and core CPI were also in line with consensus expectations. So, although there's no smoking gun, disinflation looks to have stagnated in recent months.
Powell says no hurry on cuts
Of course, what really matters is how central bankers at the Fed feel about all of this. Speaking last month at an event hosted by the Dallas Regional Chamber, Chair Jerome Powell gave us some insight. At a high level, he suggested that robust US growth offered policymakers flexibility to exert caution in lowering rates. Meanwhile, a resilient but gradually cooling labor market means the Fed need not "be in a hurry to lower rates," according to the Fed chair. The bond market was naturally less enthused by a measured approach to cuts, and Treasuries sold off on Powell's remarks.
Powell's confidence stems in part from what he's seeing in the details of recent inflation reports. That includes a broad softening of prices, the fact that wage increases aren't likely to contribute much to inflation, and the more nuanced point that some things like the rising cost of auto insurance—up by a whopping 12.7% year-over-year in November—are actually a sort of "catch-up inflation" that he's confident will dissipate in due course. The Fed also expects housing costs to continue to rise as time goes on.
Other Fed officials weigh in
That said, Fed officials have shown varying levels of dovishness in terms of how policy could play out in the months ahead. Boston Fed president Susan Collins, interviewed last month, said a December cut is "certainly on the table, but it's not a done deal." The Chicago Fed's president, Austan Goolsbee, sounded less reserved, telling CNBC that "as long as we keep making progress toward the 2% inflation goal, over the next 12 to 18 months, rates will be a lot lower than where they are now." According to CME Group data, traders now see a roughly 96% chance of a cut in December. In the end, similar to the Conclave smoke signals, we will know when we know, and we must await the signals after the voting session.
Disclosure: This article was revised and reprinted with permission from Rayliant Investment Research in partnership with Affinity Investment Advisors.
Advisory services offered through Sowell Management, a Registered Investment Advisor. The views expressed represent the opinion of Sowell Management. The views are subject to change and are not intended as a forecast or guarantee of future results. This material is for informational purposes only. It does not constitute investment advice and is not intended as an endorsement of any specific investment. Stated information is derived from proprietary and non-proprietary sources that have not been independently verified for accuracy or completeness. While Sowell Management believes the information to be accurate and reliable, we do not claim or have responsibility for its completeness, accuracy, or reliability. Statements of future expectations, estimates, projections, and other forward-looking statements are based on available information and Sowell Management’s view as of the time of these statements. Accordingly, such statements are inherently speculative as they are based on assumptions that may involve known and unknown risks and uncertainties. Actual results, performance or events may differ materially from those expressed or implied in such statements. Investing in securities involves risks, including the potential loss of principal. While equities may offer the potential for greater long-term growth than most debt securities, they generally have higher volatility. International investments may involve risk of capital loss from unfavorable fluctuation in currency values, from differences in generally accepted accounting principles, or from economic or political instability in other nations. Past performance is not indicative of future results.