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Last week it was the Nasdaq's turn to reach a new milestone, briefly surpassing the 20,000 mark.
The winning formula for the stock market this year has been solid economic growth, rising
corporate profits, moderating inflation, and the start of central-bank easing. The outlook
remains positive, but the improvement in inflation is stalling in the fourth quarter,
creating some uncertainty about what comes next for central banks. We share our take on
what the latest U.S. CPI (consumer price index) means for the Fed and review the recent
moves from the world's major central banks.
The November CPI was the last key datapoint before this week's Fed meeting, and heading into
the release there was some nervousness about the potential for an upside surprise. However,
results came right in line with expectations, suggesting that even though the progress in
bringing inflation down has slowed, it is not about to reverse in any major way. Core
consumer inflation, which excludes the volatile food and energy costs, rose by 0.3%,
leaving the annual rate unchanged at 3.3% for the third straight month. This pace of
price increases is half of the 6.6% peak in 2022, but still higher than the Fed would like.
The headline CPI ticked up to 2.7% from a year ago, the first back-to-back annual acceleration
in eight months, partly driven by food and gasoline1. Outside of those categories, prices of cars,
furniture, hotels and airfare increased at a faster pace, likely reflecting the strength in
consumer spending that continues unabated (the recent hurricanes also played a role in boosting
demand and prices for cars). While we expect inflation to move slightly higher in the next two
months based on tougher comparisons from a year ago -- the so-called base effects -- we don't
think that would represent a change in the overall trend. Leading indicators, like prices paid
by manufacturers and service firms, do not point to a second wave of inflation, but rather some
persistence of current readings.
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Shelter inflation has been one of the most persistent categories of price pressures, making up
the bulk of CPI gains this year. However, housing costs rose 0.2%, posting the smallest monthly
increase since January 2021. This helped the annual rate fall below 5% for the first time in
over two-and-a-half years, providing hope that the long-awaited slowdown in housing inflation
may be around the corner1. Based on timely market-based measures for rents and home prices,
we think that the disinflationary trend in shelter inflation has more room to go. Given the
category's 35% weight in the consumer price index, a housing cooldown can go a long way in
helping overall services inflation ease further.
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In our view, last week's data will not deter the Fed from lowering its policy rate this week.
There were no big surprises in either the consumer or producer price index, while last month's
uptick in unemployment was consistent with policymakers' view that the labor market is no
longer a source of inflation. The September Fed projections implied two additional cuts this year,
one of which was delivered in November, and the bond market is now pricing in a 95% chance of
another quarter-point cut in December. However, as we enter 2025 the Fed will likely slow its
pace of easing, as uncertainty around the path of inflation rises. Progress on disinflation has
slowed, and potential changes in fiscal, trade and immigration policies may complicate the Fed's
effort to reach a neutral rate, a level that’s neither restrictive nor stimulative for the economy.
We think the Fed's updated December interest-rate projections (the dot plot) may shift slightly
higher, projecting a shallower easing cycle ahead, as both growth and inflation have been
stronger than expected since September. We are looking for two or three rate cuts in 2025,
with the fed funds rate settling in the 3.5% - 4% range by the end of the year.
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Last week the BoC lowered its policy rate by half a percentage point to 3.25%, the high
end of its 2.25%-3.25% estimate for the neutral rate. Over the past six months the bank
has cut rates by 1.75%, faster and deeper than any other advanced economy1. Unemployment has
risen to a two-year high at 6.8%, as population has been rising faster than jobs, core inflation
is within the BoC target range, and economic growth in the fourth quarter has been weaker than
expected1, all suggesting that policy no longer needs to be in restrictive territory. However, now
that rates are in the neighborhood of neutral, policymakers are signaling that they will downsize
the rate cuts and move at a more gradual pace. Last week the ECB was another central bank that cut
rates, lowering them by a quarter point, as expected. After four rate cuts in this cycle, the bank's
policy rate has come down one percentage point, leaving it at 3%. Unlike the U.S., the outlook for
growth and inflation are being revised lower, and markets are starting to price in a deep
rate-cutting cycle for next year. Also in the region, Switzerland's central bank surprised
markets with a 0.5% rate cut, reducing its policy rate from 1.0% to 0.5%, the largest reduction
in nearly a decade. With swifter rate cuts abroad, the difference between domestic and international
interest rates is providing a boost to the dollar against a basket of other major currencies.
From an economic standpoint, this can make imported goods cheaper, helping U.S. inflation moderate.
From a portfolio standpoint, international stocks tend to underperform during periods of a
strengthening dollar, supporting our view that U.S. stocks are well-positioned to continue to lead.
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Heading into 2025, it is clear that the direction of travel for interest rates is lower, but
the speed and depth of rate cuts is more uncertain. Unlike this year where the Fed and others
delivered larger rate cuts, the pace will likely slow, as central banks try to balance cooling
but still above-target inflation with a resilient economy and labor market. The Fed does not
want to overstay its welcome in restrictive territory, risking an economic slowdown, but at the
same time there are no reasons for urgency in normalizing policy. After a year of the economy
defying expectations for a slowdown and after the U.S. presidential election, investor and
CEO confidence is now surging. The NFIB small business optimism index released last week saw
the largest month-over-month jump in 30 years on prospects for tax cuts and other pro-growth
policies. Capital spending that was delayed because of the election uncertainty may materialize
in 2025 and beyond, helping manufacturing activity recover and potentially sustaining the strong
economic momentum. However, investor sentiment is heating up as well, and as the bar of
expectations keeps rising, it leaves potential room for periodic disappointments. A shallower
rate-cutting cycle suggests that borrowing costs may remain high for longer, putting a
lid on how far valuations can rise. But the winning formula's ingredients are still in place.
Wages are rising faster than inflation, the economy continues to add jobs at a healthy clip,
corporate profit growth is accelerating, and enthusiasm around innovation and artificial
intelligence remain alive and well. Historically, the third year of a bull market tends to be
choppier. However, conditions are in place for balanced and well-diversified portfolios to still
deliver positive but moderating returns in 2025.
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Market value of the top 10 stocks of the S&P 500 hit a massive $20.9 TRILLION, a new record.
This year, their market cap skyrocketed $7.3 TRILLION.
They are worth more than German, Canadian, UK, Indian and Japanese markets COMBINED.
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The annual income needed to buy the median-value home in the US risen to a record $109,564.
This value has DOUBLED in just 4 years.
Currently, the median US household income is $83,431, or $26,133 less than required.
To put this into perspective, at the 2006 housing bubble peak this difference was ~$10,000, or 2.6x less.
The gap between income needed to buy a home and annual income has never been larger.
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Final Words: Markets are at the alltime high and fed is cutting
interest rate, caution warranted. Below is CNN Greed vs Fear Index, pointing at
'neutral' while global political turmoil is at peak.
Below is last week sector performance
report.
If you are looking for investment opportunities, you can take a look at our
Hidden Gems
section, and if you want to see our past performance, visit our
Past Performance section. If you are looking for
safe and low cost Exchange Traded funds(ETFs), check out our
ETF recommendations.
Currrent Shiller PE (see below) is showing overbought conditions as index is far above mean/media
and our AryaFin engine is indicating caution. Have a good weekend.