Financial Market Roundup
Produced by Fifth Third's Investment Management Group
In the following piece, Fifth Third's Investment Management Group recaps the market and how it reacted to various events in the month of December 2024.
GLOBAL
TRENDS
After restrictive monetary policies helped to curtail persistent inflation, most global economies have begun to lower interest rates to help foster growth and support global labor markets. Short-term interest rates from most of world’s largest central banks are still elevated relative to the last decade which adds pressures to global financial systems.
Additionally, geopolitical conflicts in Western Europe and the Middle East have added to economic uncertainty. Aside from the human tragedy that is always associated with War, these conflicts have also added to risks and volatility for financial markets.
Taken together, recent global and economic actions have kept investors on edge. Despite these concerns, global economic growth remains resilient, driven by consumer spending in most developed nations. We expect this to continue in 2025, although likely at a slower rate than historical norms.
CENTRAL BANK
POLICIES
The Federal Open Market Committee (FOMC) last met on December 18th and lowered interest rates by 25 basis points leaving their target range for the Federal Funds rate at 4.25%-4.50%.
In a prepared statement by the Federal Reserve, it was noted that, “…the committee decided to lower the target range for the federal funds rate by 1/4 percentage point…” to ensure, “… supporting maximum employment and returning inflation to its 2 percent objective.” The committee meets again on January 29th and markets are expecting a pause on the current interest rate cut cycle. Looking out over all of 2025, markets are expecting only one-or-two 25 basis point interest rate cuts.
The European Central Bank (ECB) last met on December 12th and lowered their target interest rate by 25 basis points, the third rate cut of 2024. In a prepared statement it was noted that future decisions: “… will be based on its assessment of the inflation outlook in light of the incoming economic and financial data, the dynamics of underlying inflation and the strength of monetary policy transmission.” At the end of December, market participants expect another 25-basis point cut from the ECB at its first meeting in 2025, at the end of January, and four-or-five 25 basis point cuts for the entire year.
EQUITY
PERFORMANCE
Domestic Equities were down in December, with smaller companies detailing a worse month than their larger counterparts as noted by the Russell 2500 underperforming the S&P 500. Additionally, most domestic equities underperformed international equities, despite many international equity indices also posting losses.
Focusing on the S&P 500, 9 sectors detailed losses in December with Materials plummeting by over 10% during the month.
Third quarter 2024 earnings season for the S&P 500 detailed earnings growth of 8.5% when compared to 2023 third quarter earnings, the fifth quarter in a row of actual earnings growth. In the month ahead, 186 companies are set to report their financial results. Current expectations are for continued strong earnings growth in the fourth quarter of 2024, with expected earnings growth of over 8%. Looking at fiscal year 2025, current estimates are implying earnings growth of over 12% as compared to 2024.
Looking at performance, the S&P 500 Index fell by 2.4% in December. The blue-chip Dow Jones Industrial Average fell by 5.1% over the month. The tech heavy NASDAQ Composite posted gains of 0.6%. International stocks also posted poor results with the MSCI All Country World Index of developing and developed market stocks falling by 2.3% in December. The MSCI Emerging Market Index posted losses of 0.1% in December. The MSCI EAFE Index of developed international equities retreated by 2.3% in December.
INTEREST RATES
AND GROWTH
On December 19th, third quarter U.S. GDP was revised higher from 2.8% to 3.1%, beating expectations and higher than second quarter’s 3.0% growth. The report detailed a strong and resilient U.S. consumer with personal consumption contributing over 2.5% of the growth in the U.S. economy.
At this past December’s FOMC meeting the Fed released an update on their Summary of Economic Projections which details the central bank’s outlook on a variety of prospective economic measures. Specifically, investors digested higher expected GDP growth and lower unemployment forecasts for 2025. This good news was somewhat offset by a higher core inflation expectation for 2025 when compared to the previous Summary of Economic Projections.
During the month of December, the U.S. Treasury yield curve steepened with maturities under a year seeing lower rates and maturities over a year seeing higher rates. Specifically, in December the 2-year U.S. Treasury yield rose 9 basis points to 4.24% while the 10-year U.S. Treasury yield rose 40 basis points to 4.57%.
Mortgage Rates moved slightly higher in December as the Freddie Mac 30-year Primary Mortgage Market Survey rose to 6.85% on December 26th, up 4 basis points from November 27th.
POLITICAL AND
REGULATORY TRENDS
The Election on November 4th resulted in a Republican sweep of the White House, Senate, and House of Representatives. The last time Republicans swept in an election was following the 2016 election. Following the election President Donald Trump has been very active naming his cabinet members and addressing potential tariffs on global trade partners in response to various fiscal concerns.
INVESTMENT
TRENDS
Despite a poor month for domestic equities, we continue to
see strong earnings results paired with strong earnings growth expectations. Headline inflation has moved lower over the last year, but progress appears to have stalled with November’s CPI print coming in at 2.7%, slightly higher than the prior two months.
Core prices, or CPI excluding Food and Energy, also continues to be above the U.S. Central Bank’s 2.0% target, with the most recent reading detailing core prices rising at 3.3% over the last year. Third quarter U.S. GDP report detailed a resilient and strong consumer with an expanding US economy growing at 3.1%. Finally, the most recent Summary of Economic Projections detailed an expected 2025-year end GDP of 2.1% with inflation measures above the U.S. Central Bank’s target of 2.0%.
Stresses on the global financial system, cooling-but-persistent inflation domestically and abroad, and geopolitical tensions continue to weigh on investor sentiment. On balance, the head-and-tail winds currently at play suggest there is a potential path for global economic growth, albeit at a slower pace than initially expected pace.
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