Weekly Commentary for the week ending December 13, 2024

Highlight on Central Banks:

As global financial markets navigate the final stretch of the year, central banks find themselves at a pivotal crossroads. Last week, the Nasdaq celebrated a milestone, briefly breaking the 20,000 marks, a reflection of solid economic growth, rising corporate profits, moderating inflation, and the early stages of central bank easing. But the path forward is anything but straightforward. Inflation’s recent stall in the fourth quarter has injected a dose of uncertainty into the outlook for monetary policy, particularly for the Federal Reserve. Let’s break down the latest inflation data and its implications for central banks worldwide.

November CPI: Progress, but at a Crawl

The latest U.S. Consumer Price Index (CPI) data offered a mixed picture. While fears of a sharp inflation uptick proved unfounded, the pace of disinflation has clearly slowed. Core CPI, which excludes food and energy, rose 0.3% in November, keeping the annual rate steady at 3.3% for the third consecutive month. Encouragingly, this represents significant progress from the 6.6% peak in 2022. However, inflation remains above the Fed’s comfort zone, leaving monetary policymakers in a delicate balancing act.

A Closer Look: Resilient Consumer Spending Fuels Price Gains

Not all inflationary pressures are easing. The headline CPI rose to 2.7% year-over-year, marking the second consecutive month of acceleration—a trend we haven’t seen since early in the year. This uptick was driven not only by volatile categories like food and gasoline but also by discretionary goods and services. Items like cars, furniture, airfare, and hotel stays saw price increases, reflecting robust consumer demand and, in some cases, supply shocks (such as hurricane-related impacts on car demand).

Looking ahead, inflation may tick slightly higher over the next few months due to base effects (comparing against lower year-ago levels). However, leading indicators like producer prices and service sector costs suggest these pressures are unlikely to signal a resurgence of inflation but rather a persistence of current levels.

Central Bank Dynamics: Moving Cautiously

For central banks, including the Fed, the direction of policy—toward easing—is clear. What remains uncertain is the speed at which rate cuts can safely proceed. While inflation is no longer the runaway threat it was in 2022, its slow retreat leaves little room for aggressive easing. The Fed will likely proceed cautiously, ensuring that any reduction in rates doesn’t reignite inflationary pressures.

The situation is similar for other major central banks. The European Central Bank and the Bank of England have taken tentative steps to wind down their tightening cycles but face a challenging backdrop of uneven growth and sticky inflation. Meanwhile, the Bank of Japan has begun adjusting its ultra-loose policies, reflecting a slightly brighter inflation outlook in its economy.

Looking Ahead: Balancing Act for 2025

As we move into 2025, central banks are likely to maintain a “wait-and-see” approach, balancing the need to support economic growth against the risk of reaccelerating inflation. For markets, this means periods of volatility as investors weigh the timing and pace of rate cuts. However, the broader trajectory of monetary policy appears set: the era of relentless tightening is behind us, and central banks are shifting gears to foster a smoother path forward.

For investors, the current environment presents both opportunities and risks. While inflation uncertainty and slower central-bank action may temper enthusiasm, the combination of moderating price pressures, resilient consumer spending, and robust economic growth suggests a supportive backdrop for equities in 2025. Bond markets, too, remain attractive, with yields offering compelling options for income-focused investors.

In short, the road ahead for central banks may be winding, but the destination is clear. Patience will be key as policymakers and markets navigate the uncertain terrain of disinflation and recovery

This past week highlighted the mixed dynamics that define today’s investing environment. While the major US equity indices were mostly lower, the divergence across sectors and asset classes provided valuable signals for investors.

Market Recap: A Mixed Performance Across Indices

The Russell 2000 significantly underperformed, spotlighting ongoing struggles in smaller-cap equities, while the Nasdaq was buoyed by strength in big tech. An equal-weighted S&P 500 performed largely in line with the official index, underscoring the concentrated influence of mega-cap names. Within the big tech sphere, Alphabet (GOOGL) surged +8.6% on a quantum computing breakthrough, while NVIDIA (NVDA) lagged (-5.7%), weighed down by a Chinese regulatory probe.

WealthTrust Long Term Growth Portfolio Weekly Top 10

Sector Standouts and Laggards

Underperformers spanned a broad spectrum, from industrial metals and biotech to banks and homebuilders, reflecting a cautious sentiment in economically sensitive areas. Conversely, outperformers included China tech, apparel manufacturers, and trucking, showcasing pockets of resilience driven by sector-specific tailwinds.

In commodities, WTI crude oil gained 6.0% for the week, brushing aside concerns of a 2025 oil glut, while gold edged up 0.6% amid a stronger dollar. Meanwhile, Bitcoin was relatively stable, signaling a pause in the volatile crypto trade.

Key Themes Driving the Market

1. Corporate Earnings:

Earnings announcements highlighted the market's demanding bar for high-growth companies. Standouts included:

• Oracle (ORCL) fell -9.5% despite positive AI cloud takeaways, as its results and guidance missed lofty expectations.
• Adobe (ADBE) dropped -15.7% on light forward guidance, despite a fiscal Q4 beat.

In contrast, Dave & Buster's (PLAY) plunged -25.4% after missing expectations, while Walgreens Boots Alliance (WBA) surged +21.4%, reportedly exploring strategic alternatives.

2. Economic Data:

The November CPI report was a pivotal economic event. While core and headline inflation came in line, a deceleration in shelter inflation stood out. This further cemented market expectations for a December rate cut, now priced at nearly 100%.

On the bullish side, the NFIB small business optimism index saw its highest print since June 2021, snapping a 34-month streak of uncertainty. However, the PPI report highlighted margin pressures in machinery and vehicle wholesaling, alongside rising inflation expectations in NY Fed surveys.

3. China and Regulatory Actions:

China’s Politburo pledged more stimulus, offering a boost to sentiment in China tech, but the Chinese antitrust investigation into NVIDIA weighed on the broader AI narrative. Meanwhile, U.S. regulatory developments, including Biden’s reported plan to block the Nippon Steel-X merger, added complexity to global corporate strategy.

Sector Performance: Winners and Losers

From a sector perspective, Communication Services (+2.42%) and Consumer Discretionary (+1.40%) led the pack, with Tech eking out modest gains (+0.16%). Meanwhile, Materials (-2.91%), Utilities (-2.70%), and Healthcare (-2.35%) lagged, underscoring a challenging environment for defensively oriented sectors.

What Lies Ahead?

Investors now turn their attention to a packed calendar of macroeconomic events and corporate earnings next week. Highlights include:

• FOMC Meeting: A potential rate cut will dominate headlines on Wednesday.
• Economic Data: November Retail Sales, Industrial Production, and Housing Starts will provide fresh insights into economic momentum.
• Notable Earnings: Reports from General Mills (GIS), FedEx (FDX), and Nike (NKE) will shed light on consumer and industrial trends.

Investment Implications

The market’s mixed performance underscores the importance of balance and selectivity in portfolio construction. While near-term catalysts like the December rate cut and China's stimulus offer optimism, risks remain from elevated valuations and geopolitical uncertainty.

Investors should focus on high-quality names with robust fundamentals and compelling growth narratives. At the same time, cautious positioning in economically sensitive areas may help mitigate downside risks.

As we approach the year's final stretch, staying nimble and informed will be key to navigating an evolving market landscape.