Nicolet Wealth Management Monthly Newsletter – 12.4.24
Federal Reserve Cuts Rates 0.25%
The Federal Open Market Committee (FOMC) extended the Federal Reserve’s rate cutting cycle by lowering its target rate by 0.25% to a range of 4.50%-4.75% after a 0.50% cut at the September meeting. Notably, the FOMC changed its policy statement by deleting “greater confidence that inflation is moving toward 2%”, implying that price growth is no longer its singular focus. Instead, attention has been shifted to labor market conditions, which have “generally eased” rather than having “slowed”. As of November 30, the Fed Funds futures, a representation of the market’s expectation of the Federal Reserve’s target rate, expressed that the market expects three 0.25% rate cuts through the end of 2025, down from five 0.25% rate cuts at the end of October.
Holiday Consumer Spending Momentum Building
October retail sales advanced 0.4% on top of an upwardly revised 0.8% gain in September. A rebound in autos was a catalyst for the upside, offset by spending at health, sporting goods, hobby and furniture stores. Adding to the growth upside, services spending continues to hint at a rotation back into consumer discretionary purchases, underscoring momentum going into the holiday season. Consumers tend to thrive when uncertainty is eliminated, and with the election in the rearview mirror, positive income growth could be a catalyst for retail sales through the duration of 2024.
Mixed 3rd Quarter Earnings Season
Results for 3rd Quarter 2024 corporate reporting season topped earlier forecasts for both earnings and sales, as earnings per share advanced 8.96% versus initial forecasts of 4.23% and sales growth topped the expectation by 1.27%. However, the beats were less broad based than normal. The number of companies exceeding expectations was lower than average at 75.4% vs. 78.7%, while the number of companies exceeding sales expectations totaled 52.9%, lower than the average by nearly 10%. Communication services, consumer discretionary and financials topped expectations the most, while energy, industrials, and materials missed expectations. However, those companies that beat expectations were rewarded the most in share price performance.
Small-capitalization Companies Rally Post-Election
US stocks rallied in November, with the S&P 500 index advancing 5.9%, the Dow Jones Industrial Average rising 7.7%, and the Nasdaq Composite Index increasing 6.3%. However, smaller companies led stock market gains, as the Russell 2000 index (small-capitalization) returned 11% and the Russell Mid-cap index rose 8.8%. Investors viewed the election results as relatively more beneficial for smaller companies because of the potential for a better tax and business-friendly environment. According to Goldman Sachs research, companies in the Russell 2000 index have the highest sensitivity to a change in the tax rate – a 1% change in the tax rate has a 1.2% impact on the earnings of the Russell 2000 index, while the S&P 500 index has just over a 0.8% impact.
Risk-on Propels High Yield Bonds
After peaking on November 13 at 4.45%, the 10-year Treasury yield declined nearly 0.28% to close the month at 4.17%. The impact on economic activity and inflation from the future Republican majority policy continues to be weighed by the bond market. The risk-on sentiment, as stocks rose about 6% last month, was a positive catalyst for the riskier segment of the bond market. US corporate high-yield bonds advanced 1.2%, beating the overall US bond market return of 1.1%.
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