Market Monitor | December Update
Headlines and Highlights
- Large caps top market with big annual gains again: U.S. stocks tied to the artificial intelligence boom helped pace the market to gains exceeding 20% for a second straight year in 2024. Even after a December downturn on renewed concern about inflation and interest rates, the Standard & Poor’s 500 delivered a 25% return, including dividends. Combined with a 26% total return in 2023, it was the best two-year performance for the large-cap index since 1998. Small caps tailed off last month following their post-election surge but still logged double-digit gains for the year. REITs and bonds also stumbled in December but ended 2024 with full-year gains.
- Federal debt ceiling back in place: The limit on borrowing by the U.S. government was reinstated to begin the new year, setting up an early fiscal showdown in the new Congress. Lawmakers will have only a short period – exact deadline yet to be determined – to cut spending or raise the ceiling again, otherwise the Treasury will be barred from further borrowing to pay the government’s existing debt. President-elect Trump has urged lawmakers to suspend or eliminate the debt ceiling before he takes office January 20th, removing an obstacle to his spending priorities, but fiscal conservatives oppose its abolishment.
- China taking steps to brace for U.S. tariffs: China signaled plans for more stimulus measures to support the world’s second-largest economy ahead of an expected new trade war. President Xi Jinping made a rare public acknowledgment of the country’s economic troubles in his New Year’s address, while insisting the economy remains “stable and steady” overall. The People’s Bank of China said it will cut interest rates, and other government support measures are planned to counter U.S. tariffs under the Trump administration. China’s economy is pressured by weak domestic demand and an uncertain outlook for exports, key to its growth.
Select Market Returns
Our Views
- Market breadth declined in the fourth quarter amid concern over interest rates poised to stay higher for longer, suggesting weakening momentum for the two-year-old rally. However, we anticipate a wider group of stocks delivering positive returns again in the months ahead given the solid economy and expectations for corporate earnings growth, rejoining a rally still led by the Magnificent Seven.
- The U.S. economy enters 2025 in healthy shape, bolstered by a strong labor market and resilient consumers. It should benefit further from the pro-growth policies of the incoming administration as well as the lagging positive effects of lower interest rates following reductions made by the Fed in September, November and December.
- Inflation faces a more uncertain outlook in the near term due to tariffs and other policies proposed by President-elect Trump, along with its recent stickiness. While progress toward the 2% target could remain bumpy, we believe the disinflation trend will ultimately continue and a return to significantly higher inflation is unlikely any time soon.
- The Federal Reserve is likely to forgo a fourth consecutive interest-rate reduction at its January meeting. With above-average inflation still not fully tamed, Fed officials will want to see evidence of further cooling along with details of the new administration’s fiscal, regulatory and trade policies before resuming rate cuts.
- Bond yields are likely to remain volatile but range-bound over the next six months, with the economy and inflation not expected to change dramatically in the early months of a new presidency. We expect bond investments to remain stable and deliver positive returns.
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