Latest Inflation Data Report Gives Bulls Fodder for Year-End Rally

One would be hard pressed to find a more influential force on the stock market than the selling pressure exhibited in the U.S. Treasury market for the past two weeks, where the yield on the benchmark 10-year T-Note jumped from 4.12% to 4.59% in the span of two weeks before getting rescued by Friday’s inflation data. The Fed’s preferred index, the Personal Consumption Expenditures Index (PCE), came in at 0.1% at the Core level for November, versus 0.2% consensus. Down from 0.3% in the prior October, it read and held steady at 2.8% year over year.

This particular report was music to the ears of bullish investors following hotter economic data that included Retail Sales for November (0.7% versus 0.5% forecast), Initial Claims (220,000 versus 237,000 forecast), Q3 Gross Domestic Product (GDP) Estimate (3.1% versus 2.8% forecast) and Leading Indicators for November (0.3% versus -0.1% forecast). This week, investors will process some not-so crucial data that includes Consumer Confidence for December, Durable Goods Orders for November, New Home Sales for November, Initial and Continuing Unemployment Claims, Advanced Retail and Wholesale Inventories for November and Crude Oil Inventories for the week of Dec. 21.

As expected, December brought a 25-basis-point rate cut, but ongoing resilience in economic data and relative hawkishness from the Fed weighs on future rate cut expectations for January and March. Congress was able to avert a government shutdown, passing a short-term funding fill last Friday to keep the federal government open until March 14, 2025, that was signed into law by President Biden on Saturday. It was the third such short-term spending bill passed by Congress in 2024, and shows just how strained the budget process has become and in desperate need of fixing.

It is a positive development to see the yield curve normalized after so long being inverted, which typically signals recessionary risks are on the horizon. For Europe, Japan, Australia, Canada, South Korea and Switzerland, their yield curves are all inverted, putting the United States in a unique position globally among developed nations. With the stock market having digested all the pertinent economic data that can rattle the bond market, there is a good chance Friday’s relief rally can build on itself, assuming Treasury yields hold steady and hopefully build on Friday’s higher prices as well.

Looking at the equity market for 2024, the gains fueling the S&P 500’s 24.3% gain have been fairly concentrated among five market sectors. Year-to-date sector performance as of Dec. 20 is as follows:

Communication Services Select Sector SPDR Fund (XLC) +35.94%

Financial Select Sector SPDR Fund (XLF) +30.48%

Consumer Discretionary Select Sector SPDR Fund (XLY) +28.83%

Utilities Select Sector SPDR Fund (XLU) +23.47%

Technology Select Sector SPDR Fund (XLK) +23.23%

Industrial Select Sector SPDR Fund (XLI) +18.54%

Consumer Staples Select Sector SPDR Fund (XLP) +13.22%

Real Estate Select Sector SPDR Fund (XLRE) +4.27%

Materials Select Sector SPDR Fund (XLB) +1.33%

 Energy Select Sector SPDR Fund (XLE) +2.79%

Health Care Select Sector SPDR Fund (XLV) +2.33%

Many wonder if this year’s laggards will be next year’s winners, but it seems that as the year comes to a close, many of the same market tailwinds that boosted outperformance for communication services, financials, consumer discretionary, utilities and technology are still in place heading into 2025. Just because we are turning the calendar doesn’t mean we have to make material changes. Much of what is working now is positioned to keep working going forward.

What is important is that the market broadens out in the next year and will not be so top heavy and dependent on just the biggest cap stocks that got the S&P up to the 6,100 level before retracing some of the gains this month. Much will depend on the nature and purpose of tariffs, taxes, deregulation and labor in the coming months and how they impact each market sector.

The Trump administration is set to make the first hundred days full of changes that will certainly keep investors on their toes. But until the Inauguration on Jan. 20 arrives, with the PCE inflation data coming in tame, the S&P 500 has the potential to take out 6,100 and power higher into 2025.