Santa Falls

MPS Bulletin: Santa Falls

Santa Falls

December 2024. by PM

As widely anticipated, the Federal Reserve reduced the official interest rate by 0.25% in the last meeting on the year. What was perhaps less widely anticipated was the market reaction, a historic sell off by some measures, in response to Jerome Powell’s determinedly ‘hawkish nature’.


Financial markets had been pricing in 4 interest rate cuts next year, which in combination with a red blooded White House had driven large cap US markets to new highs for 2024. Some though had been left behind.


Reining back expectations for looser monetary policy shouldn’t have necessarily come as a surprise. Labour markets remain strong and retail sales have been firm enough. Perhaps of greater concern to investors though, in digesting fewer interest rate cuts next year, was the Fed Chair’s comment that the Committee would need to see further progress in the disinflationary trends, to justify another rate reduction. Of course, in some corners there is evidence that the disinflationary trend which began in 2022 has been stalling. In fact, the Fed itself projects slightly higher prices going forwards.


As that conclusion dawned, the markets sold off heavily, with most assets falling significantly, with only the US Dollar a safe port in a storm. Notably, whilst the Nasdaq lost approximately 4%, Bitcoin held up reasonably well and continues to trade above 100,000 USD mark – although we do expect a dip below that.


However, yesterday’s action in many respects was to see certain sections of the market catch up with others. The Dow Jones Industrial has been on a historic losing streak, as well as US smaller companies, which is all the more noteworthy as they had been tipped to be the major beneficiaries of Trump’s economic adrenalin shots. So it was only a small cohort of large cap companies that were holding markets up, and yesterday’s action was really for those stand out performers to ‘catch down’ with the average stock in the US markets.


Figure 1: Most US stocks had been falling since the beginning of December

Source: ARIA, Barchart



Fixed Opinions

Since the Federal Reserve began to cut interest rates in September, the fixed income markets, specifically US government bonds have not really sought to take note. The US 10 Year is now nearly 70 basis points higher than where it was in September during the first cut. Clearly the bond markets are not reading the script, and perhaps they are also sensing some inflationary pressures building once more. Certainly investors are discarding longer duration bonds, (10 and 30 years), in droves.


Figure 2: Expected Change to Unit Costs over Next 12 Months: Median

Source: Federal Reserve Bank of Atlanta/Haver Analytics/RenMac



RenMac, an institutional research firm have pointed to the above chart which measures businesses’ read on inflation. Interestingly, they see continued slowing inflation down to 2% (which happens to be the Fed’s target). The advantage of viewing expectations of businesses, rather than individual consumers, is that they are less sensitive to the vagaries of food and housing costs. Moreover, the above shows how businesses also anticipated the surge in prices well before the global central banks of the world recognised the problem in 2021.

We’re minded to agree – the price action of the more economically sensitive sectors is suggesting that all is not well - that we could well see some softer economic data going forwards and inflation is not necessarily the issue that the Fed sought to underline yesterday. The hawkish rhetoric is very likely to have been an attempt to give themselves some room for manoeuvre and talk the market down a little from lofty valuations.



Figure 3: Basic Materials Shares are painting a slowing growth picture

Source: ARIA, TradingCharts.com



The chart above shows how the Basic Materials sector, those companies who produce the raw materials the world consumes, metals, minerals, glass, cement and timber, has actually been falling for some time. Energy, transports and metals like copper all show a similar picture. Of course, the economic challenges in China have a major bearing on the performance of industrial metals, but really it has only been the United States (powered by massive fiscal stimulus and infrastructure programs), that had extended its business cycle. Europe, Latam and China have been treading water economically speaking for some time. The UK economy of course has been toiling too; even whilst the economy has contracted for two consecutive months, the Bank of England felt compelled today to keep interest rates as they are, after figures showed that inflation has risen for two months in a row. That is to describe stagflation and the recent budget as unveiled by Chancellor Rachel Reeves will seemingly do little to arrest flatlining growth.

Seasonally speaking, the famed ‘Santa Claus’ rally usually begins mid-December month, and tends to persist until New Year. However, most investors are already overinvested in stock markets, with very low cash positions. Some could well decide to book profits ahead of the January reset, and so a meaningful bounce is not a given. Our attention is elsewhere - we’re minded to begin wading into the waters of the fixed income markets once more, as we believe that tepid global growth will be enough to contain inflation and having been swept away in the deregulatory and tax lite euphoria of a Trump presidency, now underprices the risks of decidedly underwhelming turn out from here.



Wishing all our readers the happiest and healthiest of the festive period and the New Year beyond that.

Information is based on our current understanding of taxation legislation and regulations. Any levels and bases of, and reliefs from, taxation are subject to change. Tax treatment is based on individual circumstances and may be subject to change in the future. Although endeavours have been made to provide accurate and timely information, we cannot guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No individual or company should act upon such information without receiving appropriate professional advice after a thorough review of their particular situation. We cannot accept responsibility for any loss as a result of acts or omissions.

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