Nasdaq Closes About 20,000

As we forecasted a few weeks ago in this commentary, the Nasdaq closed above 20,000 points before year-end, driven primarily by Big Tech. Still, last week was mostly weak as we were down four out of five days. Despite those down days, the market was relatively flat because the one day of the week when we were up (Wednesday) was pretty solid. The S&P 500 nearly set another record that day just as the Nasdaq broke 20,000. But the Dow has faded a bit after hitting 45,000 in early December.

Markets seem to have slowed their torrid pace from just after the election. Is this the start of something or just a pause before we resume an upward push? After three of the benchmark indexes set significant new milestones (S&P 500 6,000, Dow 45,000 and Nasdaq 20,000), it looks like the markets may be pausing as we wind down 2024.

The final major event of the year before markets effectively shut down for the holidays will be the Federal Reserve meeting this Tuesday and Wednesday. Expectations are for another 25-basis-point (0.25%) cut. After a brisk post-election run-up with markets close to all-time highs, markets will again begin to speculate when and how much the Fed will cut again. They’ll also start analyzing the potential impact of new policies from the incoming administration.

I know it’s tempting to check out and watch all the stories about rogue drones, but after a really strong year the dawn of a new one is a really good opportunity to review your allocations and portfolio positioning. Reconfirm your risk tolerance and make sure your goals are still the same and on track. We’re excited for the new year, but it’s good to remain grounded and mindful that the markets can surprise us in unexpected ways.

Inflation Stays Stuck but the Fed is Still on Track for One More Cut

Inflation isn’t improving. The Consumer Price Index (CPI) came in at 2.7% year-over-year, up from the 2.6% reported last month. The slight increase was mostly anticipated and that’s why markets rallied on Wednesday; inflation was a tad higher, but not high enough to prevent the Fed from lowering rates by another quarter-percent at its final meeting of the year.

The CPI remains stubbornly above the Fed’s 2.0% mandate, suggesting inflation progress has stalled. The 12-month reading rose for the second month in a row. Notably, that 2.7% gain in prices over the past year was despite a 3.2% decline in energy prices over the same one-year period.

Stripping out both food and energy (known as core CPI) shows a 3.3% increase in the past year. The main driver of core inflation has been housing rents, which rose again in November. The Producer Price Index (PPI) rose 0.4% in November, and prices have been accelerating over the past six months.6 The rise in November was led by food prices, which jumped 3.1% due to nearly a 56% surge in egg prices due to the bird flu, which has hurt egg production. Plus, energy prices rose slightly by 0.2%.

The food and energy categories have played an outsized role in the inflation readings over recent months. Even when you strip out these historically volatile components, “core” producer prices still rose 0.2% in November and are up 3.4% in the past year, a notable acceleration from the 1.9% reading this time last year.

What does all this mean for markets? First, prices are continuing to rise and pinch the consumer, who accounts for 70% of the economy. Second, the Fed may have to slow its roll with any additional rate cuts in 2025. That leaves the markets — which are priced to perfection right now — vulnerable because the Fed may not deliver as many rate hikes as the market is pricing in. Right, markets are expecting rates to be lower by about 1% this time next year. They’ll be disappointed if that doesn’t happen, and we know that almost never ends well.