Market Recap: Stocks Rebound on Cooling Inflation Data, Ending Volatile Week on a High Note
Major Indexes Surge as PCE Report Eases Inflation Concerns
The U.S. stock market staged a remarkable comeback on Friday, December 20, 2024, as investors digested a better-than-expected inflation report and looked past concerns about potential interest rate cuts. The Dow Jones Industrial Average (^DJI) led the charge, surging 2% or approximately 800 points, while the S&P 500 (^GSPC) and the tech-heavy Nasdaq Composite (^IXIC) both climbed about 1.8%.
This positive turn came after a tumultuous week that saw significant losses following the Federal Reserve’s indication of fewer-than-expected interest rate cuts in 2025. The market’s rebound was primarily fueled by the release of the Personal Consumption Expenditures (PCE) index, the Fed’s preferred measure of inflation, which came in lower than economists had estimated.
Inflation Data Provides Relief
The Core PCE Price Index for November showed a month-over-month increase of just 0.1%, down from the previous reading of 0.3%. This cooling inflation data provided a welcome reprieve for investors and the Federal Reserve alike. The year-over-year Core PCE remained steady at 2.8%, while the overall PCE Price Index rose slightly to 2.4% from 2.3% the previous month.
In response to this encouraging data, the yield on 10-year Treasuries dropped to 4.50%, down from Thursday’s closing level of 4.57%. This decline in yields helped boost equity valuations and investor sentiment.
Sector Performance and Notable Stocks
The market rally was broad-based, with all but nine S&P 500 stocks advancing. However, the technology sector showed mixed results. While some megacap tech stocks like Nvidia (NVDA), Apple (AAPL), Microsoft (MSFT), Alphabet (GOOGL), Amazon (AMZN), and Meta Platforms (META) experienced early losses, they managed to pare some of these declines as the day progressed.
Notable performers included:
1. Tesla (TSLA): Despite a 2.86% drop, the electric vehicle maker has seen a 26% surge in December.
2. Alphabet (GOOGL): The tech giant has gained over 12% this month.
3. Broadcom (AVGO): After predicting booming demand for its custom AI chips, Broadcom’s shares have skyrocketed 35% in December, pushing its market value over $1 trillion.
On the downside, Nike (NKE) shares fell by 2.37%, likely due to concerns about consumer spending and global economic uncertainties.
Upcoming Market Events and Potential Catalysts
As we approach the end of the year, investors are keeping a close eye on several key events and potential market movers:
1. Government Shutdown Concerns: Lawmakers in Washington D.C. are working to avoid a government shutdown, which could impact market sentiment.
2. “Santa Claus Rally” Expectations: Historically, the last five trading days of the year and the first two of the following year have yielded an average S&P 500 gain of 1.3%. However, some analysts suggest this rally may have occurred early with November’s strong performance.
3. Year-End Portfolio Rebalancing: With the S&P 500 up over 23% for the year, many investors may engage in year-end rebalancing, potentially leading to increased volatility.
4. Earnings Season Anticipation: As we enter 2025, the market will be closely watching fourth-quarter earnings reports for signs of continued corporate strength.
Market Outlook and Investor Sentiment
While today’s rally is encouraging, some market watchers urge caution. The S&P 500’s forward price-to-earnings ratio of 21.6 remains well above its historical average of 15.8, suggesting stocks may be overvalued. Additionally, the narrowing breadth of the market rally, with only 56% of S&P 500 stocks trading above their 200-day moving averages, raises concerns about the sustainability of the bull run.
As we head into the final trading days of 2024, investors will be watching closely to see if the market can maintain its momentum and deliver the traditional year-end “Santa Claus Rally.” However, with geopolitical uncertainties, potential shifts in monetary policy, and ongoing economic challenges, market participants should remain vigilant and prepared for potential volatility in the coming weeks.
