Tell Me Why

Issue 369

By Jeffrey Trusheim, Chief Financial Officer, Mortgage Solutions of Colorado, LLC DBA, Mortgage Solutions Financial.

Mortgage Solutions presents Issue 369 of Market Pulse. This commentary will provide Trusheim's perspective of the economic, political, and technical considerations that will have an impact on the global & domestic financial marketplace. The report will provide a recap of the previous week's activity as well as a look at the important market-moving factors in the week ahead.

With core CPI, GDP growth, and the Fed’s consumer survey all pointing towards 3%, it begs the question: Why is there a near 100% likelihood that the Fed is going to cut rates by 25 basis points at this week’s FOMC meeting?

The headline Consumer Price Index (CPI) showed a 12-month inflation rate of 2.7%. Excluding food and energy costs, the core CPI was at 3.3% on an annual basis. Both readings are well above the Fed’s 2% target.?

The Producer Price Index (PPI), a measure of wholesale prices, rose more than expected in November to an annual rate of 3%, the biggest increase since February 2023. This raises the question of whether the Fed’s progress in reducing inflation has slowed.?

One popular item in most everyone’s grocery cart just got a lot more expensive. Egg prices contributed to the stubborn grocery inflation in November, jumping 8.2% month-over-month and 37.5% year-over-year.?

Respondents to the regional Fed bank’s survey of consumer expectations in November see inflation a year from now at 3%. Inflation in three years is seen at 2.6%, and in five years is expected to be 2.9%. All three expectations are higher than they were in October’s survey.

GDP growth in the third quarter came in at 2.8%, and the Atlanta Fed estimates GDP growth in the fourth quarter will be 3.3%, well above the CBO’s (Congressional Budget Office) 2% estimate of long-term growth in the US. In other words, momentum in the economy is strong, and the incoming administration (with more tax cuts and deregulation) may add additional tailwinds to the outlook.?

Combined with the recent uptrend in inflation, the probability is rising that the Fed may have to raise interest rates in 2025. If indeed this were to happen, it wouldn’t be the first time. We saw this back in the 1990s, when the Fed cut rates a few times and then started raising interest rates again. History doesn’t always repeat, but it often rhymes. ?

THE STOCK MARKET

In a word…the market has BAD breath. Concerns sparked by the hot inflation data is weighing on market sentiment and was a contributing factor that caused the S&P 500 to snap it’s three-week win streak. The Dow has declined for seven consecutive days, giving back 1,186 points, and producing its biggest decline since 2020.?

The S&P 500 is now on a ten-day run of negative market breath - meaning there have been more decliners than advancers on the index for ten consecutive trading days. The last time such an event happened was in the aftermath of 9/11.?

Technically, the S&P 500 continues to struggle with the 6,100 resistance area, and finished the week at 6,051, down 39 points. Initial support comes in near the 6,000 region, followed by key support at 5,850. Most all technical indicators continue to point to a topping process, but have yet to confirm a top as being in place or have generated a sell signal. The market seems to be in “purgatory”; not sure if the next move is to go up towards Heaven or down towards Hell. ?

Over the long-run, the S&P dividend yield ranges from near 1% to near 4%. The current dividend yield is 1.21%, the lowest since 2000, and the second lowest since 1988. This might be cause for concern, however, the growing popularity of share buybacks may have changed the significance of dividend yields.?

Here are the Y-T-D returns:

S&P 500 +27%, Dow +16%, Nasdaq +29%, Russell +16%, Utilities +19%, Banks +37%, Broker/Dealers +49%, Semiconductors +23%, Gold +28%, Silver +28%

As we head into the final two weeks of 2024, I might add that there have been only four times in the last 100 years that the S&P 500 has been up 20% or more for two consecutive years. Three of the four times, the market was down in the following year.?

THE BOND MARKET

The inflation monster did a number on the bond market last week. The 10-year Treasury yield rose from a low of 4.13% on Monday morning to a high and closing yield at 4.40% on Friday afternoon, up 26 basis points on the week. It was the largest weekly jump since October 2023.?

With CPI, PPI, and GDP holding at higher-for longer levels, coupled with overheating risks rising and Team Trump ready to hit the ground running next month, you can’t fault the bond market for being apprehensive. IMHO, the Fed should be on the sidelines.?

The Fed’s final FOMC monetary policy rate decision of the year will come on Wednesday afternoon. Despite the hotter than expected inflation data last week, the market is pricing a near certainty that the Fed will deliver a 25-basis point interest rate cut.?

Other important data this week includes the November Retail Sales report, as well as the PCE data. Remember, the core PCE (Personal Consumption Expenditures) price index is the Fed’s favorite inflation gauge. It should be an interesting week.?

Have a great week!?

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?Jeff Trusheim is the CFO of Mortgage Solutions Financial. Jeff is a 30+ year veteran in the Wall Street arena, with a background in economics, risk assessment and finance (banking and mortgage). He has previously worked in Fortune 500 companies in growing their portfolio and economic footprint.