Market Update: December, 23, 2024

Welcome to the Monthly Market Update from Signature Wealth Management. I’m Brian Ransom, Research Director from Signature Wealth and here’s what happened in the market this month.

To end the year, the market had a strong rally following the results from the presidential election. But we have run into a bout of volatility in the middle of December. Causing the spike in volatility was a clear change in language and direction from the Federal Reserve that caused a sharp selloff in bonds and stocks alike.

While the December meeting from the Federal Reserve did result in an interest rate cut, Chairman Powell felt the need to reset market expectations for further rate cuts going forward. Quote: “I think that a slower pace of rate cuts really reflects both the higher inflation readings we’ve had this year and the expectations that inflation will be higher” in 2025. Language like this caused long term interest rates shown here in blue to rise relative to last month.

As a result, market expectations for a cut in the January meeting are now essentially zero. Likewise, the market is really only pricing in 1 or 2 rate cuts by the third quarter of 2025. This in turn caused a heavy selling day that resulted in a 3% drop in the S&P on December 17^th.

Looking ahead to 2025, the market is pricing in a lot of positivity for both the economy and market returns. Shown here is the Price to Earnings ratio or PE ratio for the S&P 500 in blue and the equal weight S&P in purple. The PE ratio is a measure of how much investors are willing to pay for a dollar of earnings. Currently, the S&P is pricing in $21.47 per dollar of earnings. Generally speaking, I would consider this PE ratio elevated just based on the fact that the last time the PE ratio was this high was in 2021 and shortly thereafter, prices started to fall beginning in 2022. I would point out that this ratio is not a great timing indicator and can remain elevated for a long period of time. In this case, the PE ratio was elevated for almost 2 years before finally correcting in 2022. While the market cap weighted S&P 500 has an elevated PE, the equal weighted index does not. It’s PE ratio is only 16.7x and is no where near the highs set in 2021. This implies that there are a lot of expensive names sitting at the top of the S&P, but not all 500 names are necessarily expensive based on this ratio.

Going into 2025, I would absolutely keep an eye on the 10-year treasury, shown in blue. The last two times the 10-year treasury yield crossed above the 4.5% range; we saw some increased volatility in the stock market (shown in purple). The 10-year tends to respond to variables like inflation, economic health, and Fed messaging. 2 of the 3 were front and center in the last Fed meeting. We are right at a 4.5% yield as we speak.

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Sources:

1. FactSet Research Systems. (n.d.). S&P 500 (Interactive Charts). Retrieved December 23, 2024, from FactSet Database.
2. FactSet Research Systems. (n.d.). Treasury yield curve (markets). Retrieved December 23, 2024, from FactSet Database.
3. FactSet Research Systems. (n.d.). Policy Rate Tracker (markets). Retrieved December 23, 2024, from FactSet Database.
4. FactSet Research Systems. (n.d.). S&P 500 & RSP NTM PE ratio (interactive charts). Retrieved December 23, 2024, from FactSet Database.
5. FactSet Research Systems. (n.d.). 10-year US treasury yield & S&P 500 (interactive charts). Retrieved December 23, 2024, from FactSet Database.

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