December 2024 - Market Update

Data Dashboard

Stock Market

Nasdaq 100 composite was the only major equity index up for the month. December saw Technology and the Mag 7 stocks outperform — the same trend that we've seen all year. Consumer Discretionary was the best performing sector, primarily driven by Tesla and Amazon. Materials was the worst performing sector, declining by almost 11% as the likelihood of a tariff-driven trade war between the US and China looms.

Markets were relatively steady until the Dec-18 FOMC announcement, when the Fed announced a 25bp rate cut but dialed back on their September guidance of 4 cuts in 2025 to 2 cuts. The markets reacted and a sell-off followed, with the S&P 500 dropping 3% almost immediately. With the economy expected to heat up and rising inflation expectations for 2025, Mid-cap and Small-cap stocks pulled back as investors took some chips off the table.

"No Santa-Claus rally in 2024"

International stocks have been weighed down by geopolitical tensions for a while now, and they have consistently lagged US stocks. Political uncertainty within some of the largest democracies in the world has been a constant source of worry.

The US dollar has been rising steadily, especially since the November presidential election outcome. A second, larger phase of dollar strength may come if the U.S. puts tariffs on China and if the yuan falls against the dollar—like in 2018, to offset the tariff competitiveness hit. Such a fall could lead to significant depreciations in emerging markets, put downward pressure on commodity prices, tighten global financial conditions, and increase the risk of negative spillback to the US.

December Monthly Returns (by US Sector)

Bond Market

US bonds dropped 1.64% for the month. The Fed lowered the Fed Funds rate by 25bps, bringing it down to 4.25% - 4.50% during the Dec 17-18 meeting. However, bond yields rose considerably on the Fed's dovish future rate cut guidance. The 10Y treasury yield ended the month at 4.57%, up from its Nov-29 close of 4.17%. High-yield spreads loosened a little in December, and ended the year at 2.87%.

The breakeven inflation rate for 5-year Treasury-Inflation-Protected-Securities (TIPS) stayed almost flat, but the shorter term breakeven rates are starting to creep up, suggesting increasing shorter term inflation expectations.

Economics

Donald Trump has vowed to impose 10% tariffs on global imports and 60% on Chinese imports. In retaliation, China banned the export of critical minerals to US, further escalating trade tensions. Critical minerals include gallium, germanium and antimony, which have widespread applications in military, semiconductors, IR technology and EV batteries. The Materials sector took the brunt of this in December. Canada is also exploring the possibility of retaliatory tariffs on the US.

GDP came in at 2.8% QoQ annualized, and the Fed's preferred inflation gauge (Core Personal Consumption Expenditure index) came in at 2.8% YOY. The Unemployment rate also rose to 4.2%, but remains near its historical lows, supporting the narrative for a resilient economy and up trending inflation.

December Economic Dashboard

Tactical Trades

Our quantitative tactical stock portfolio is currently overweight on IT and Financials, and underweight on defensive sectors like Utilities, Health Care and Energy.

In our tactical ETF portfolio, we added some exposure to Mid-cap and Small-cap stocks through the Vanguard Extended Market ETF.

Given the volatile interest rate environment, and higher shorter duration yields, our tactical fixed income portfolio is still overweight in short-term bonds, convertible bonds and senior floating rate instruments.

General Client Considerations

2025 IRS annual contribution limits for 401(k), 403(b), most 457 plans and Thrift Savings Plans (TSP) increased from $23,000 to $23,500. Changing your elections at the beginning of the year can help spread out contributions evenly, and ultimately maximize your tax advantaged retirement savings. If you are participating in a company sponsored retirement plan and maxing out your contribution, please reach out to your HR department to ensure your contribution amount has been updated to reflect the new maximums.

Additionally, if you are 50 or older, the catchup contribution limit for 401(k), 403(b) and TSPs has remained the same at $7,500. If you are born in 1975 or earlier, you can contribute up to $31,000 to these accounts in 2025. You do not have to wait until your 50th birthday to make catchup contributions - the contributions can start on January 1st of the year you turn 50.

Starting 2025, if you are aged between 60-63, you can contribute up to a total of $34,750 (eligible for a higher catch-up contribution due to SECURE 2.0).

For more information, check out our newsletter on 2025 Retirement Account Limits.

As always, reach out with any questions or concerns.

Thanks,

The Friedenthal Financial Team

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