Hero image

Profit Taking Finishes the Year

By on Jan 22 in Economics, Finance, highlights, Investing, Market Update, Politics

Quick Take: Stocks and bonds fell in December after the Federal Reserve projected fewer rate cuts in 2025 than markets had been expecting.[1]

 

Equities finished a strong year with a whimper, as the S&P 500 fell 2.5% in December — the worst monthly loss since April. [2] This was just after stocks had just posted their largest monthly gains of the year in November of 5.7%.[3], [4] The 10-year Treasury bond yield, which is often used as a benchmark for consumer loans like mortgages and auto loans, performed poorly, with yields rising nearly half a percentage point in December.[5] In a year when rate cuts started, lackluster bond performance was somewhat disappointing.

Stocks and bonds moved lower in December after the Federal Reserve (Fed) reset market expectations to fewer rate cuts in 2025.[6] The retreat happened towards month end on thinner volumes and was often led by the technology sector, which has driven gains all year.[7] The volatile month ended with a string of down days as investors took profits off the table.[8]

You might say that a Santa Claus rally came a little early this year. The S&P 500 rocketed through 57 record highs to post gains of 23% for the year.[9], [10] Despite a year-end stumble, the broad equity index logged its best consecutive years in a quarter-century, since the years before the dot.com bubble burst. [11] Gold also had its best year since 2010. [12]

 

Treasuries Face Challenges

2024 turned out to be a bit of a let-down for bond investors, as bonds were mostly  expected to perform better as rate cuts began.[13] A broad index of the Treasury market eked out returns for the year of less than 1%.[14] Prices fell and yields rose, as the Fed moved more slowly than expected amid continued economic strength.[15]

Ten-year Treasury yields have now risen for four years in succession, which is the longest stretch since 1981.[16] It was also the fourth year in a row that short-term T-bills, which are more sensitive to the Fed’s policy rate, outperformed longer-dated Treasury bonds, which hasn’t happened since 1992.[17] Short-term Treasuries are more like cash instruments and bond investors hoped for better returns holding longer-term debt.

How did we get here?

 

Risk On

Source: https://www.bloomberg.com/news/articles/2024-12-20/powell-s-battle-ready-fed-gives-the-trump-trade-a-stress-test

 

A global fund manager survey from early December showed that allocations to US equities moved to record highs while cash holdings have practically evaporated.[18] Cash as a percentage of total assets under management fell to 3.9% in early December. As a result, positioning fell to net 14% underweight cash – a record low – from 4% overweight in the previous month.[19] Essentially, fund managers likely plowed cash they were holding into stocks.

Tech shares still did most of the heavy lifting, powering markets higher. Through Dec 24, the Magnificent Seven megacap stocks of Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla contributed to more than 53% of the S&P 500’s total return, with Nvidia alone making up 21% of it. [20] Other sectors like financials, utilities, and industrials also did well to round out the rally.[21] Meanwhile, smaller capitalization stocks, like those in the Russell 2000, have notably underperformed. The Russell 2000 is down 8.7% off its 2021 high, while the S&P 500 is up 25% over that same period. [22] A strong US economy and a Fed that was about to start cutting rates created a backdrop for a rosy 2024.

 

Fed Resets Interest Rate Expectations

The Fed kickstarted rate reductions with a bang in September, beginning by cutting 50bps (half a percentage point).  As inflation continues to hold above the central bank’s 2% target, the December Fed meeting tone notably shifted.[23] Although they cut rates by a quarter point, it was described as a “close call”, coming with an added dose of caution about the extent of further cuts.[24]

 

Source: https://www.cnbc.com/2024/12/18/fed-rate-decision-december-2024-.html

 

Fed chair Jay Powell noted that “we’re in a good place,” while signaling a new phase going forward for policy, saying “we’re going to be cautious about further cuts.”[25] After the 25bps December cut, Fed fund rates are now at a two-year low – having come down a full percentage point since September.[26] Although the Fed remains confident price pressures will continue to come down, the Fed has at least started to incorporate “highly conditional estimates of economic policy effects.”[27] Any potential impacts from changes in tariffs, tax cuts, and immigration policy will have to be factored into policy-making decisions. At the very least, some uncertainty has been introduced.

Markets tend not to like uncertainty. Stocks nosedived after Powell’s comments and the release of the Fed’s updated forecasts for inflation and interest rates.[28] In the immediate response, stock indexes saw their biggest one-day slide in months.[29] The new projections showed most Fed officials expect just two cuts in 2025, compared to four after the September meeting.[30]

 

Source: https://www.ft.com/content/53941f30-c5d2-494a-9c41-7f0666905dd8

 

Why leave interest rates at higher levels? As central banks set monetary policy, they keep an eye on what’s considered a neutral level of interest rates. Neutral interest rates are a general level that is neither restrictive nor stimulative for the economy. Over the last few years, most of the Fed committee participants think the long-run neutral interest rate has risen, although there is no definitive agreement on exactly what that rate is.[31]

 

Looking Ahead

As we look back on another year, we’re reminded of the value of staying focused on the bigger picture, even through market ups and downs. Although the current rise in equities markets since 2022 seems extraordinary, it has been the second shortest bull market, with the second smallest cumulative gains since 1928.[32] A long-term approach is designed to weather the inevitable swings in the market and support your goals, and we’re here to help you navigate it every step of the way.

Our thoughts are also with everyone impacted by the LA fires and those who’ve faced loss and disruption. We extend our heartfelt gratitude to the first responders working tirelessly to protect our communities.

Please don’t hesitate to reach out with any questions. It’s an honor to work with you, and we appreciate the confidence you place in us. May the new year offer a fresh start that brings good health and blessings!

 

Your Friends at JSF

 

 

The information expressed herein are those of JSF Financial, LLC, it does not necessarily reflect the views of NewEdge Securities, Inc. Neither JSF Financial LLC nor NewEdge Securities, Inc. gives tax or legal advice. All opinions are subject to change without notice. Neither the information provided, nor any opinion expressed constitutes a solicitation or recommendation for the purchase, sale or holding of any security. Investing involves risk, including possible loss of principal. Indexes are unmanaged and cannot be invested in directly.

Historical data shown represents past performance and does not guarantee comparable future results. The information and statistical data contained herein were obtained from sources believed to be reliable but in no way are guaranteed by JSF Financial, LLC or NewEdge Securities, Inc. as to accuracy or completeness. The information provided is not intended to be a complete analysis of every material fact respecting any strategy. The examples presented do not take into consideration commissions, tax implications, or other transactions costs, which may significantly affect the economic consequences of a given strategy. Diversification does not ensure a profit or guarantee against loss. Carefully consider the investment objectives, risks, charges and expenses of the trades referenced in this material before investing.

Asset Allocation and Diversification do not guarantee a profit or protect against a loss.

The Bloomberg Barclays U.S. Aggregate Bond Index measures the investment-grade U.S. dollar-denominated, fixed-rate taxable bond market and includes Treasury securities, government-related and corporate securities, mortgage-backed securities, asset-backed securities and commercial mortgage-backed securities.

The S&P 500 Index is an unmanaged, market value-weighted index of 500 stocks generally representative of the broad stock market.

TLT-iShares 20 Plus Year Treasury Bond ETF seeks to track the investment results of an index composed of US Treasury bonds with remaining maturities greater than twenty years.

The CBOE Volatility Index (VIX) is a real-time index that represents the market’s expectations for the relative strength of near-term price changes of the S&P 500 Index (SPX). Because it is derived from the prices of SPX index options with near-term expiration dates, it generates a 30-day forward projection of volatility. Volatility, or how fast prices change, is often seen as a way to gauge market sentiment, and in particular the degree of fear among market participants.

The Nasdaq Composite is a market-capitalization-weighted index consisting of all Nasdaq Stock Exchange listed stocks that are not derivatives, preferred shares, funds, exchange-traded funds or deben­ture securities.

Treasury Bond- is a U.S. government debt security with a fixed interest rate and maturity between two and 10 years.

Gross domestic product (GDP) is a monetary measure of the market value of all the final goods and services produced in a specific time period. GDP is the most commonly used measure of economic activity.

By clicking on these links, you will leave our server, as they are located on another server. We have not independently verified the information available through this link. The link is provided to you as a matter of interest. Please click on the links below to leave and proceed to the selected site.­­

[1] https://www.cnbc.com/2024/12/19/what-to-expect-from-global-central-banks-in-2025-after-fed-slows-cuts.html

[2] US Stocks Fall to Close Out Best Two-Year Stretch Since 1998 (yahoo.com)

[3] S&P 500, Dow Notch Records to Cap Best Month of the Year – WSJ

[4] S&P 500 Clocks Best Month of the Year; Yields Drop: Markets Wrap (yahoo.com)

[5] https://www.cnbc.com/2024/12/27/10-year-treasury-yield-27-december-2024.html

[6] US Stocks Drop for a Third Day; Treasuries Rally: Markets Wrap (yahoo.com)

[7] Stocks drop in thin year-end trade amid tax selling, profit taking | Reuters

[8] US Stocks Drop for a Third Day; Treasuries Rally: Markets Wrap (yahoo.com)

[9] https://www.wsj.com/finance/stocks/stocks-on-pace-for-best-two-years-in-a-quarter-century-c5b5f9b3

[10] US Stocks Fall to Close Out Best Two-Year Stretch Since 1998 (yahoo.com)

[11] US Stocks Fall to Close Out Best Two-Year Stretch Since 1998 (yahoo.com)

[12] Wall Street Expects Gold to Glitter Again in 2025 – WSJ

[13] https://finance.yahoo.com/news/treasuries-see-hoped-rally-fizzle-163922271.html

[14] https://finance.yahoo.com/news/treasuries-see-hoped-rally-fizzle-163922271.html

[15] https://finance.yahoo.com/news/treasuries-see-hoped-rally-fizzle-163922271.html

[16] https://finance.yahoo.com/news/treasuries-see-hoped-rally-fizzle-163922271.html

[17] https://finance.yahoo.com/news/treasuries-see-hoped-rally-fizzle-163922271.html

[18] Powell’s Battle-Ready Fed Gives the Trump Trade a Stress Test (yahoo.com)

[19] https://www.bloomberg.com/news/articles/2024-12-17/bofa-s-sell-signal-for-stocks-triggered-as-cash-holdings-tumble

[20] https://www.wsj.com/finance/stocks/stocks-on-pace-for-best-two-years-in-a-quarter-century-c5b5f9b3

[21] https://www.wsj.com/finance/stocks/stocks-on-pace-for-best-two-years-in-a-quarter-century-c5b5f9b3

[22] https://www.wsj.com/finance/stocks/stocks-on-pace-for-best-two-years-in-a-quarter-century-c5b5f9b3

[23] https://www.cnbc.com/2024/12/18/fed-rate-decision-december-2024-.html

[24] https://www.cnbc.com/2024/12/18/fed-rate-decision-december-2024-.html

[25] https://www.cnbc.com/2024/12/18/fed-rate-decision-december-2024-.html

[26] https://www.wsj.com/economy/central-banking/fed-cuts-interest-rates-again-but-officials-expect-fewer-reductions-in-2025-70562fac

[27] https://www.reuters.com/markets/us/fed-expected-combine-interest-rate-cut-with-hawkish-2025-outlook-2024-12-18/

[28] https://www.wsj.com/economy/central-banking/fed-cuts-interest-rates-again-but-officials-expect-fewer-reductions-in-2025-70562fac

[29] https://www.wsj.com/economy/central-banking/fed-cuts-interest-rates-again-but-officials-expect-fewer-reductions-in-2025-70562fac

[30] https://www.wsj.com/economy/central-banking/fed-cuts-interest-rates-again-but-officials-expect-fewer-reductions-in-2025-70562fac

[31] https://www.ft.com/content/53941f30-c5d2-494a-9c41-7f0666905dd8

[32] Stocks Rocked by Late-Week Swoon in Tech Giants: Markets Wrap (yahoo.com)

What's trending

view all

Giving Back Minor Gains

Read more

Stocks Deliver Best Month of the Year

Read more

Profit Taking Finishes the Year

Read more

MEET YOUR JSF FINANCIAL TEAM
Contact us and meet your advisors today.

Let's Connect

JSF logo

Subscribe to our mailing list and stay up to date with the latest information.


By submitting this form, you are consenting to receive marketing emails from: . You can revoke your consent to receive emails at any time by using the SafeUnsubscribe® link, found at the bottom of every email. Emails are serviced by Constant Contact