Below are the economic and market highlights for the week:
- The Federal Reserve held its last FOMC meeting of the year. In a widely expected move, the central bank lowered rates by 25 bps to a benchmark target range of 4.25% to 4.50%. However, markets were rattled by the news that the Fed will ratchet down its pace of rate cuts from four to two in 2025 on inflation concerns. The dot plot, which indicates individual members’ expectations for rates, showed Fed officials now anticipate next year’s benchmark lending range to fall between 3.75% and 4.00%. Over the long term, the central bank sees the “neutral” funds rate at 3.00%, 0.1 percentage points higher than the September update.
- Consumers continued to check off their holiday shopping lists in November. Retail sales rose 0.70%, topping estimates of 0.50%. That followed an upwardly revised 0.50% gain in October. Autos, online sales, and sporting goods and hobby stores led the way higher, increasing 2.60%, 1.80%, and 0.90%, respectively. That more than offset a 3.50% drop in miscellaneous stores and 0.60% at department stores.
- Boom times for the services sector offset a weak manufacturing sector. The services sector expanded at its fastest clip in more than three years as businesses look forward to a business-friendly Trump White house. The S&P Flash U.S. Services PMI jumped to 58.5 in December from 56.1 in the prior month. December’s reading was its highest reading in 38 months and the highest since 2015 if the pandemic years are excluded. Numbers above 50 indicate expansion while numbers below indicate contraction. Manufacturing on the other hand remained mired in recession, dipping to a three-month low of 48.3 in December from 49.7 in November. The downturn in manufacturing the past two years is the worst since 2009.
Fed Stuffs Investors’ Stockings With Coal
The Santa Rally grew more elusive for bulls this week as the Federal Reserve rattled markets on Wednesday as it lowered its pace of rate cuts in 2025 from four to two. The major averages plunged on the news with the Dow dropping 1,100+ points during the session for its worst losing streak since an 11-day slide in 1974. The S&P 500 and Nasdaq Composite Index followed suit, losing 2.95% and 3.56% respectively. Wall Street’s fear gauge, the VIX, surged 74%, the second biggest percentage in its history, rising to 27.62. The one-day surge was trumped only by a 115% leap to a level above 37 back in February 2018 when there was a blow-up in funds tracking the volatility index. Meanwhile, bond yields jumped with the 10-year U.S. Treasury yield topping 4.50%. Bulls attempted to rebound on Thursday, hoping to take advantage of the Dow’s 10-day losing streak. The index was up more than 460 points at session high. However, their attempts were thwarted by high drama on Capitol Hill as an initial House GOP deal to avoid a government shutdown fell apart and led the major averages to finish the session relatively flat. The House GOP cobbled together a second deal to fund the government but that too fell apart on Thursday evening. Bulls struggled to push indices higher early in Friday’s trading session as they continued to digest the Fed’s announcement and remained wary of a shutdown. However, they got a second wind on the back of a lighter than expected PCE Index, the Fed’s preferred inflation gauge, keeping hopes alive the Fed will ultimately be prompted to return to their original rate cut pace. In the meantime, the race was still on for a House GOP bill to avert a government shutdown with mere hours left to do so.
Since the election, markets had been in full rally mode on the expectation for lower rates and a pro-business friendly White House in 2025. However, with markets trading at stretched valuations and the consensus among most analysts and economists calling next year another strong year for gains, it comes as no surprise they would be rattled by the news of slower rate cuts and disfunction on Capitol Hill. Despite investors seemingly being caught off guard by the Fed’s announcement, it is well justified in its more cautious outlook. Since their first rate cut in September, the labor market has stabilized, core inflation has firmed, the consumer is strong, and business optimism is high. With the Fed having lowered its policy rate by a full percentage point from its peak, it seems to be the right time to move more slowly on interest rates on the back of persistent inflation and potential inflationary tariff headwinds from the Trump administration. Add the failure of two House GOP deals to avert a government shutdown and investors are becoming more concerned that pro-business friendly plans may not be able to easily sail their way through the halls of Congress even with a Republican-controlled Congress and White House. The Fed simply has no incentive to either lower rates, risking having to raise rates if inflation rekindles, or to use up its most direct form of stimulus when the economy seems to be doing just fine on its own. Investors may have been disappointed with the message they received from the Fed this week, but it is not like we have not been treated to a gift this year with most major indices up 20%+ heading into the final trading days of 2024.
The Week Ahead
That’s a wrap folks! With the holidays upon us and the year drawing to a close, Week in Review will take a pause from the action. We’ll see you next year with our next edition hitting your inbox on January 10, 2025.
Glimmers to Brighten the Holiday Season
As we count down to the holidays and the new year, we wish everyone a season filled with hope, joy, laughter, and happiness. We also hope your celebrations are filled with “glimmers” — small, positive moments or sensations that activate a sense of calm or joy. These fleeting experiences can be as simple as savoring a warm cup of coffee, listening to a favorite song, smelling fresh-cut grass, feeling sunshine on your face, having someone hold the door for you, or the satisfaction of completing a task. While glimmers aren’t grand gestures, they offer quiet moments of peace that can help counterbalance the stress of the season.
The term “glimmer” is relatively new in psychological literature, however, the idea of small, fleeting positive experiences has existed for a long time in various forms—such as mindfulness practices, positive psychology, and gratitude exercises. These approaches often emphasize appreciating the small moments that contribute to well-being. The specific terminology of “glimmers” has gained more prominence in recent years. They were first described by therapist Deb Dana in her book The Polyvagal Theory in Therapy: Engaging the Rhythm of Regulation. In her book, Dana explains that when we experience a glimmer, it helps re-regulate the body’s nervous system, shifting it out of states of overwhelm or fight-or-flight and into a state of safety or calm. That sounds like something all of us could benefit from during the busy and hectic weeks ahead.
Humans are wired to scan our environment for potential threats as a survival mechanism which can lead us to disproportionately focus on negativity. When we consciously decide to focus on the beautiful and unexpected gifts in the world around us, we help train our brains to pay attention to the positive, rather than fixating on stressors and potential dangers. This helps our nervous systems to relax and benefits our overall mental health.
This holiday season and in the year ahead, we hope you can take a deep breath, slow down, and allow yourself to find and savor many glimmers.
Happy Holidays from all of us at Probity Advisors, Inc. We are grateful for the trust you have placed in us and look forward to continuing to serve you and your families in 2025 and beyond.
