Week of December 16, 2024

Key Points for the Week

• Stocks mostly fell last week, with much of the overall weakness masked by strength in the consumer discretionary and communications services sectors. • Some type of early December weakness is normal. • Inflation data shows continued progress toward normalization, with problematic shelter data and a pandemic-related rise in car insurance premiums accounting for most of the excess inflation.

Current Trends & News is a weekly financial recap curated by SPC Financial®’s team of wealth management and tax-integrated advisors. We monitor and explore the intricacies of the financial world and share insights into market developments.

Economic Update

The U.S. stock market has delivered exceptional performance over the past few years and remains on track to deliver solid returns in 2024.

It is not a secret that U.S. stocks have outperformed the rest of the world. Over the past decade, the S&P 500 returned 13 [percent] a year on average, compared with less than 5 [percent] for the MSCI EAFE [Europe, Australia, and Far East] index of developed countries. Investors can thank the health of the U.S. economy and the remarkable growth of the tech sector. The downside: U.S. stocks now trade more than 21 times earnings, compared with less than 14 for international ones…

Ian Salisbury, Barron’s

In recent weeks, though, the stock market appears to have lost some steam. While Magnificent Seven technology stocks have pushed higher, many other stocks have moved lower.

The S&P 500 Index closed out its ninth consecutive day where the number of constituents falling outnumbers those rising. That is [the] longest such streak since Bloomberg started collecting the data in 2004. The development signals that the foundation of the stock-market rally is weakening, with strength in technology high-flyers offsetting softness everywhere else.

Geoffrey Morgan, Bloomberg

As the end of the year approaches, major U.S. stock indices are near record highs. U.S. Equity Strategist Mike Wilson, who is optimistic about the outlook for the U.S. stock market, told the hosts of Bloomberg Open Interest that investors should be prepared for some uncertainty and volatility and, possibly, a stock market correction.

A correction occurs when the stock market drops by more than 10 percent, and by less than 20 percent, from its recent peak. While corrections are uncomfortable for investors, they tend to wring out irrational exuberance and ring in more reasonable share price valuations, reported James Chen of Investopedia.

Last week, the Nasdaq Composite Index, which is heavily weighted in technology stocks, passed 20,000 for the first time. The Nasdaq finished the week higher, while the Standard & Poor’s 500 Index and Dow Jones Industrial Average moved lower. Concerns that sticky inflation might lead the Federal Reserve to pause its rate-lowering cycle pushed the yield on the benchmark 10-year U.S. Treasury lower last week, reported Sinéad Carew and Harry Robertson of Reuters.

This Week in the Markets

Stocks fell overall last week, with some of the weakness masked by big gains from the communications services and consumer discretionary sectors. In the process the Dow was lower all five days (and seven in a row total), yet the Nasdaq hit 20,000 for the first time ever on Wednesday. But before you get too worked up, it was just last week we discussed how the Dow had just hit 45,000 for the first time ever, the eighth 1,000-point milestone this year alone.

After the huge run stocks have seen this year, we are not overly surprised that the second week of December has seen some weakness overall. After all, this is what tends to happen in the early part of December, but there is more of the month to come and things tend to look different in December’s second half.

The S&P 500 is up only slightly on the month in December, but let us remember a few things:

• No month is more likely to be higher than December (74.3% of the time). • No month in an election year is more likely to be higher (83.3% of the time). • When the S&P 500 has been up double digits at the midpoint of the year, December has never been lower. • Only once has December been the worst month of the year for the S&P 500 (2018). • The past 10 election years saw the S&P 500 gain in December nine times. • Lastly, when stocks were up 20% or more going into December the final month has been higher nine of the past 10 times.

Inflation

November inflation data, as measured by the Consumer Price Index (CPI), landed right along expectations. Headline CPI rose 0.3% and is up 2.7% from last year. Core CPI, which excludes food and energy, also rose 0.3%, and is up 3.3% year over year. These numbers are clearly higher than the Fed’s 2% target.

Note that the Fed targets the personal consumption expenditure (PCE) inflation metric, and we believe this metric (both headline and core PCE) shows no concerning signs if you look under the hood. Still, let us focus on where “excess inflation” is coming from for CPI and compare the November data to December 2019 (when headline and core CPI were up 2.3% year over year). There have been two main drivers of excess inflation: shelter and motor vehicle insurance.

Within shelter, it is really “owner’s equivalent rent” (OER), which is the “implied rent” homeowners pay, and is based on market rents as opposed to home prices. OER makes up 27% of the headline CPI basket, and a whopping 34% of core CPI. It is now up 4.9% year over year (y/y), versus 3.3% in December 2019. That is adding 0.52%-points to “excess” headline CPI relative to December 2019, and 0.65%-points to “excess” core CPI.

The other component is motor vehicle insurance, which makes up 3% of the CPI basket (and about 4% of core CPI). Motor vehicle insurance is adding 0.35%-points to excess headline CPI and 0.44%-points to excess core CPI (relative to December 2019). That is a lot for such a low weight.

Together, OER and auto insurance fully account for the entirety of excess CPI inflation, both for headline and core. Everything else put together is making a negative contribution

Another important point here: the December 2019 levels of CPI coincided with PCE and core PCE (the Fed’s preferred metrics) running below their target of 2% (coming in at 1.5% and 1.6% y/y, respectively).

All this is year-over-year data, which is impacted by what happened last year to a degree. But things are looking up when you look at more near-term data.

For one thing, motor vehicle insurance inflation is pulling back in a hurry. Car insurance costs surged in 2023 due to lagged effects of higher car prices post-pandemic (and more car crashes), rising 26% y/y at its peak in August 2023. But the pace has eased to about 13% y/y, and just under 5% annualized over the last three months (through November).

Shelter Inflation Has Normalized

Shelter inflation is made up of two components, rents of primary residences and OER. On a year-over-year basis these are still elevated:

• Rents are up 4.4% y/y versus the 2018-2019 average of 3.7%. • OER is up 4.9% y/y versus the 2018-2019 average of 3.3%.

Here is the good news from the November CPI report: Rents were up 2.6% (annualized) and OER was up 2.8% (annualized) — both clocking in below their respective 2018-2019 averages.

Even better news is that there is likely more disinflation in the pipeline. Apartment List reports that median rents are down 0.7% y/y, the 18th straight month with a negative y/y reading. Data from Redfin tells the same story: November median asking rent price per square foot was down 2.2% y/y to $1.79. That is the 19th straight month where this reading fell y/y, and the first time it is fallen below $1.80 since November 2021.

Another Big Positive: Sit-Down Restaurant Price Inflation

One of our favorite inflation indicators is “full service meals (and snacks),” i.e. sit-down restaurant prices. It is historically tracked core inflation very closely, despite it not being in the core CPI basket, and in fact, tracks core CPI better than OER (despite OER’s huge weight in the basket). Restaurant prices make up about 8% of core PCE, and so it does matter for the Fed’s preferred inflation metric.

Full-service restaurant meals combine several elements that go into inflation, including:

• Commodity prices – obviously food, but also energy prices to an extent (for things like crop fertilizers and diesel for transportation) • Wages – for workers in restaurants • Rents – of the restaurant premises

We have seen all the above ease considerably over the last year, and that is starting to show up in the inflation data. CPI for restaurant prices is up 3.6% y/y, down from a peak of 9% in 2022. The current pace is only slightly above what we saw in late 2019.

Looking at the chart above, it may look like restaurant prices are still elevated relative to what we saw over the last decade. As discussed above, CPI inflation in late 2019 was consistent with PCE inflation running below the Fed’s target of 2%. In fact, core PCE ran below 2% across the 2010s.

All this tells us that underlying inflation is running close to the Fed’s target of 2%. Never mind lagged shelter inflation (and motor vehicle insurance).

A December Rate Cut?

Markets clearly took the inflation data as a positive with respect to Fed rate cut expectations, with the probability of another cut at their meeting next week jumping from 89% to 98%. In fact, the November Producer Price Index report suggests that core PCE (which takes inputs from CPI and PPI) will clock in around 0.1%. That is a big positive, and likely seals the deal for a cut next week.

Yet, the outlook for 2025 remains uncertain. The November CPI report generated a lot of commentary that inflation is sticky and that the Fed has an inflation problem, and that cutting as much as they have is going to be viewed as a mistake. We clearly disagree with all of this. As you saw from the numbers above, inflation really is not a problem anymore.

In fact, the risk is that the Fed falls into the trap of believing that they do have a problem, based on lagged data, and take an extended pause in 2025. That would increase the odds of having a bigger problem on our hands, in the form of continued weakness in housing, a pullback in investment, and most important, a weaker labor market. The labor market is the whole games right now, since consumer spending is being driven by income growth, and that is coming on the back of a solid labor market. Keeping policy on the tighter side risks breaking that.

What is in a Word?

Dictionaries and publications have begun to share their “Word of the Year.” For 2024, Merriam-Webster Dictionary chose “polarization,” which is defined as “division into two sharply distinct opposites; especially, a state in which the opinions, beliefs, or interests of a group or society no longer range along a continuum but become concentrated at opposing extremes.” Here are some other notable words of the year:

__ • Manifest__ was at the top of the list for the Cambridge Dictionary. “When famous performers, star athletes, and influential entrepreneurs claim they have achieved something because they manifested it, they are using this verb in a more recent sense: to use specific practices to focus your mind on something you want, to try to make it become a reality.”

__ • Brain rot__ took the prize as Oxford University Press’s word of the year. Brain rot is the “supposed deterioration of a person’s mental or intellectual state, especially viewed as a result of overconsumption of material (now particularly online content) considered to be trivial or unchallenging.”

• Demure was plucked from the crowd by Dictionary.com. For many years, demure was a compliment given to young women for being modest and reserved. In 2024, a content creator used it humorously in a way that appeared to challenge and poke fun at widespread societal expectations of how women are supposed to look and behave, reported Leslie Katz for Forbes.

• Allision was one of Merriam Webster’s runner-up words of the year. An allision occurs when a ship runs into a stationary object. The difference between “collision” and “allision” became more widely known after a cargo ship hit Baltimore’s Francis Scott Key Bridge causing it to collapse.

In general, media stories, headlines, social media trends, and online search results help determine publications’ short lists for Word of the Year. Runner-up words for 2024 included totality, democracy, pander, brat, ecotarian, romantasy, dynamic pricing, slop, extreme weather, and resilience.

What is your choice for word of the year?

A Reminder About Scams

Scams usually start with a phone call, email, text, or another form of communication. The person typically claims to be from an agency or organization you know – or one that sounds like it might benefit you, such as the National Sweepstakes Bureau or a lottery.

The person may know your name and address. They may give you their official title or an identification number. No matter how official they seem, you can be confident it is a scam if the person contacting you:

• Indicates there is a problem with your benefits. • Asks you to pay to receive a prize. • Suggests that paying will increase the chance of winning. • Requests financial information, such as a bank account or credit card number. • Pressures you to act immediately. • Tells you to pay using a specific method, such as a gift card or cryptocurrency.

If this happens, remember that the Social Security Administration, the Internal Revenue Service, Medicare, and your bank do not call, email, or text to ask for money or personal information. They do not demand that you pay immediately, and they do not accept payment by gift card, prepaid debit card, cryptocurrency, or another untraceable form of money transfer.

When you suspect a scam:

• Hang up or close the message. Do not respond in any way. • Remain calm. • Think back over the call. Write down any personal information you may have inadvertently shared. • Report the scam. Contact the Federal Trade Commission at ReportFraud.ftc.gov. You may also want to report the incident to your state’s attorney general or your local consumer protection agency. • Share your knowledge. Talk with family, friends, and neighbors about your experience so they know what to look out for.

When you receive a digital message, no matter how official it seems, do not click on any links. Do not give or confirm any personal information, including your name, birth date, phone number, address, email address, place of birth, driver’s license, passport, or Social Security numbers, bank or other account numbers, and PIN numbers.

Being skeptical can keep you safe. Remove yourself from the situation. Do not share information. If you feel anxious and need to confirm that it was a scam, contact the organization using a method provided on their official website.

Glass Ceiling Rising

The number of female CEOs at Fortune 500 companies continues to climb, rising to 55 this year versus just 24 in 2018. That number should continue to climb as eight business schools reached gender parity in 2024 among full-time MBA students, up from just one in 2020. (Source: Fortune)

Tax Bracket Adjustments

According to the IRS’ inflation adjusted tax brackets for 2025, the top tax bracket of 37% will apply to annual income above $751,601 for married couples filing jointly, a roughly $20,000 increase from 2024 levels. The standard deduction for married couples will also rise to $30,000 from $29,200 in 2024. (Source: IRS, WSJ)

How To Avoid Tax Scams

Below is a link to a video provided by the IRS to help avoid tax scams:

https://www.youtube.com/@irsvideos

If you have any questions, please contact us.

Corporate Transparency Act

On December 3rd, a federal court issued a nationwide injunction preventing the enforcement of the Corporate Transparency Act’s beneficial ownership requirements, which were due by January 1, 2025.

This injunction is preliminary and reporting companies should monitor additional updates and proceedings that could modify or change the injunction.

The Corporate Transparency Act was enacted in 2021 and was passed to enhance transparency in entity structures to combat money laundering, tax fraud, and other illicit activities.

Beginning January 1, 2024, certain business entities created or registered to do business in the United States had initially been required to report identifying information about the beneficial owners to FinCen, the Financial Crimes Enforcement Network. Per FinCen rules, a beneficial owner is an individual or group of individuals who, directly or indirectly, owns or controls the company. Reporting companies typically include:

• Domestic reporting companies: Corporations, limited liability companies, and any other entities created by the filing of a document with a secretary of state or any similar office in the United States.

• Foreign reporting companies: Entities (including corporations and limited liability companies) formed under the law of a foreign country that have registered to do business in the United States by the filing of a document with the secretary of state or any similar office.

FinCen has updated their FAQs that includes new information about the reporting process, reporting companies, reporting requirements and much more, with the expectation that further guidance will be provided in the future. The updated FAQs can be found here.

Did you Know? This Week in History

December 19, 1917: National Hockey League Opens Its First Season

On December 19, 1917, Montreal teams win the first two NHL games played. In a 7-4 win over the Ottawa Senators, the Canadiens' Joe Malone scores five goals. In his team's 10-9 win over the Toronto Arenas, the Montreal Wanderers' Harry Hyland also scored five goals.

For nearly a century, it was unknown which of the two games started first. The Senators-Canadiens game was long known to have started at 8:30 p.m. Nobody knew when the Wanderers-Arenas game began until 2017, when an old newspaper ad was discovered that showed a start time of 8:15 p.m.

A prior hockey league, the National Hockey Association, had been running since 1909, but disagreements among the league's owners were so strong that, in 1917, the league's operations were suspended, and the NHL was formed. All four NHL teams were in Canada.

When the Senators took the ice, they were without defenseman Hamby Shore and winger Jack Darragh, both for financial reasons. Shore wanted back pay, and Darragh was upset because the new league's season was 24 games and his contract called for 20.

The Wanderers later disbanded after their rink caught on fire.

Ottawa won four Stanley Cups between 1920 and 1927, but the team moved to St. Louis in 1934. Montreal and Toronto have combined to produce 37 Cup winners.

Weekly Focus

Life is like riding a bicycle, to keep your balance you must keep moving.

Albert Einstein, Theoretical Physicist

Believe you can and you are halfway there.

Theodore Roosevelt, 26th President of the United States