The economy is on a solid growth track and the S&P 500 (SPY) is making new highs once again. Even better are small caps making up for lost time with a 2 to 1 beating of their large cap peers in November.
Most things are pointing towards more stock upside. However, the recent stalling of inflations decline does call into question the pace of Fed rate cuts. Not just for the next meeting on 12/18, but as we move into 2025.
So, let’s spend some time focused on the data the Fed will be digesting before their next rate decision.
Market Outlook
This week investors got served up the Fed minutes from the November meeting where they had their second consecutive cut. Indeed, Fed officials see themselves on a rate cutting path, but not as aggressively planning to cut rates as some may think.
No doubt this is a nod to the not so spectacular inflation data over the past two months. Second, the Trump administration is contemplating some very aggressive new tariffs which most economists see as potentially inflationary.
Right now, market futures point to a 60% chance of another 25 basis point cut at the December 18th meeting. That seems a bit too optimistic given the aforementioned weak inflation reports. However, this roll call of upcoming reports could change their tune:
11/27 PCE: This report on Wednesday was another not so spectacular reading for those hoping for greater inflation declines. The fact that the Fed’s favorite singular measure, Core PCE, went up to 2.8% vs. last months reading is not a positive. The month over month tally of +0.3% points to 3.6% annual if that pace continues...that is the wrong direction for inflation.
12/3 JOLTs: The Government employment report on 12/6 is more meaningful for the state of the jobs market. But often economists talk of a change to job listings in the JOLTs report as a precursor of what happens with job gains/losses. This has been on a downward trajectory but still considered net positive for the unemployment rate. As long as a big drop doesn’t take place, then should be all good on this front.
12/6 Govt Employment Situation & Avg Hourly Earnings: Most investors just focus on job adds and the unemployment rate. However, wage inflation has been a bit too sticky at 4% year over year. I assure you the Fed is just as keen on that component of the report as they are concerned about job adds.
12/11 CPI & 12/12 PPI: These two monthly inflation reports, combined with PCE, form most investors opinions on the state of inflation. Again, they have been not really declining for about 2 months which is certainly not what the Fed wants. It may be a case of “3 strikes you’re out” pushing the Fed to hold rates unchanged if this doesn’t get back on a declining path.
12/18 Fed Rate Decision Meeting: Again, right now investors see a 60% chance of another 25 basis point cut. I agree that happens if the data in these reports concur with that motion. But if it’s a 3rd straight month of disappointing inflation data...then don’t be surprised with no cut on 12/18.
Pulling back to the big picture we are still in a bull market coming off 2 years of tremendous gains. This points to more tepid results in 2025 for the average investor.
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SPY shares were trading at $598.71 per share on Wednesday afternoon, down $1.94 (-0.32%). Year-to-date, SPY has gained 27.15%, versus a % rise in the benchmark S&P 500 index during the same period.
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Stock Market Outlook: Is Inflation Still Too Sticky? StockNews.com
