Week of December 9, 2024

Key Points for the Week

• The bull market continued last week. • Small caps had a strong month of November. • The US economy added 227,000 jobs in November, bouncing back from the October slowdown. • The unemployment and hiring rate are still at healthy levels but may be slowing down.

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 performance of the U.S. stock market is striking. Last week, the Standard & Poor’s (S&P) 500 closed at a record high for the 57th time this year, reported Rita Nazareth of Bloomberg. Here are some of the notable factors that sent stocks higher last week:

Political upheaval overseas. A declaration and cancellation of martial law in South Korea and the toppling of the French government roiled financial markets overseas, making United States markets attractive.

The political chaos spanning Seoul to Paris this week is reinforcing why many investors have chosen to stick to American markets.

Simon Kennedy and Phil Serafino, Bloomberg

A powerful technology rally. Spending and excitement around the potential of artificial intelligence (AI) continue to delight investors. Both the communication services and information technology sectors are expected to report double-digit earnings growth during the last three months of 2024, reported John Butters of Factset.

Rising company profits have been driven by higher spending.

While the ROI [return on investment] of any given AI project remains uncertain, one thing is becoming clear: CIOs [chief investment officers] will be spending a whole lot more on the technology in the years ahead. Research firm IDC projects worldwide spending on technology to support AI strategies will reach $337 billion in 2025—and more than double to $749 billion by 2028.

Paula Rooney, CIO

Continued U.S. economic strength. Employers added 227,000 new jobs in November. That was well above the 200,000 forecasted, reported Barron’s. Stocks rose on the news, and so did expectations that the Federal Reserve will lower interest rates again at its December meeting. Lower rates are typically good for companies because they often lower the cost of borrowing and lead to higher spending.

By the end of the week, the S&P 500 and Nasdaq Composite Indexes were higher. The Dow Jones Industrial Average finished lower as it has less exposure to technology stocks, according to Barron’s, and more significant exposure to a large health insurance company that saw its stock price fall sharply after the assassination of its chief executive officer last week, reported Caroline Valetkevitch of Reuters. Treasury bonds gained last week, too, as yields moved lower on expectations of a Fed rate cut.

When any asset class experiences significant gains during the year, it is important to review your investment allocations and adjust or maintain the risk profile that makes you most comfortable.

This Week in the Markets

The S&P 500 has had a strong 2024, and could go down as the best election year return ever. It has made 56 new all-time highs, among the most ever as well.

Stocks are looking at back-to-back strong years. This current bull market is nearly 26 months old, and the good news for investors is that once previous bull markets got to this point there were many more years of gains left.

Going back 50 years, we found five other bull markets that had lasted at least this long and the shortest any of them lasted was five total years. Think of it like a cruise ship — once it gets moving, it can be quite hard to stop. As you can see here, not only could there be a lot of time left, but there could be more impressive gains as well.

The Dow recently closed above 45,000 while the S&P 500 hit 6,000 for the first time ever. We are aware as stocks go higher, these 1,000-point milestones are easier to hit, as the percentage gain needed to achieve the milestone gets smaller. Still, this year will go down in the record books as a year that saw a lot of major milestones.

The Dow hit a record eight 1,000-point milestones this year and with a few more weeks to go, more could possibly be coming. In fact, it took only seven trading days to go from 44,000 to 45,000, the second fastest 1,000-point milestone ever.

Turning to the S&P 500 and 6,000, it appears that these milestone levels can be a good sign, as stocks have never been lower six months later. Past performance is not indicative of future results.

November was a huge month for stocks, but the big winner was small caps. Optimism over lower taxes, a stronger economy, animal spirits, and strong earnings all were likely reasons for the surge.

We found 22 other times the Russell 2000 gained at least double digits in a month and six months later it has been higher 90% of the time and a year later up a very solid 15% on average.

The Labor Market

The November payroll report was going to be a tricky one to parse because of a bounce back from hurricane effects (which pulled down October payrolls) and the resolution of the strike at Boeing. The economy created 227,000 jobs in November, close to expectations, which somewhat made up for the low 36,000 number in October (revised up from 12,000). This is why we always recommend taking a 3-month average to get the overall picture, and right now, that is sitting at a very healthy 173,000. For reference, the 2019 average was 166,000.

One of the more encouraging parts of the labor market, and really for the economy, is that construction employment is running solid. It was strong even in 2022 and 2023, which was another clue that a recession was not imminent. Historically, construction employment has foreshadowed further weakness across the labor market (and recessions), which makes sense because elevated interest rates (and tight monetary policy) has preceded past recessions. If housing remains weak due to elevated rates, we could see construction employment start to pull back. For now, construction employment is rising at a very healthy 2.6% year-over-year pace, spurred by building construction (residential, but also non-residential like manufacturing facilities) and even home improvements. However, this is something we are going to be watching very carefully as 2025 progresses.

Despite the healthy look on the payroll side, which comes from the government’s survey of businesses, things are less than picture perfect when you look at the household survey. For one thing the unemployment rate rose to 4.2%, just shy of the highest rate we have seen over the last two years. A year ago, it was 3.7%. The prime-age (25-54) employment-population ratio, which is a way of controlling for demographic effects and labor force participation issues, has fallen to 80.4%. That is still close to the highest we saw during the 2010s expansion, and above anything we saw in the mid-2000s, but it is fallen quite a bit from the recent peak of 80.9%. These levels are not a bad place to be if things can hold at this level, but it is the trend that is concerning.

The other aspect that is concerning is that overall hiring has slowed, a lot. Hires fell to 5.3 million in October, well below the 5.5-6 million level we saw in 2018-2019. Keep in mind that the labor force is also larger. The hiring rate, which normalizes hires by the size of the labor force, has fallen to 3.3%. That is the slowest pace since early 2013 (outside of the Covid months).

Quits have been in a general downtrend, which also highlights the fact that hiring has slowed (people tend to quit their jobs at a higher rate only if it is easy to find a job). At the same time, layoffs remain low, and that has been the datapoint that has been consistently positive as far as the labor market is concerned. Overall layoffs are clocking in around 1.6 million a month, well below the 1.8-2.0 million level we saw in 2018-2019. Again, the labor force is much larger, and if you normalize for that, the layoff rate is currently at 1%. That is well below the pre-pandemic range of 1.2-1.3%.

The big picture is that the employers are very reluctant to lay off workers right now, but hiring has slowed. So, if you have a job, or are casually looking for a better opportunity (while being employed), it is not a bad labor market environment. But if you are unemployed, it is harder to find a job than it was a year ago (let alone two years ago).

It is useful to recall that consumption accounts for close to 70% of the economy. Consumption has been driven by income growth this cycle, and right now aggregate income growth (across all workers in the economy) is running at a 5.8% annualized pace over the last three months. That is above the strong pre-pandemic pace of 4.8%. There is no reason to expect this to pull back significantly, but we may see a shift in dynamics. Aggregate income growth is the sum of employment growth, wage growth, and change in hours worked. Going forward, aggregate income growth is more likely to be powered by strong wage growth, even as employment growth slows to a 150,000-175,000 average monthly pace. Over the last three months, wage growth has run at an annualized pace of 4.5%.

Another reason for optimism is that we expect headline inflation to remain muted (close to the Fed’s target of 2%), in no small part due to easing energy and food prices. That means real wage growth is likely to remain strong, supporting consumption.

Given the current picture of the labor market — a healthy level overall, with some worrying downtrends — the Fed is likely on track to cut rates at their December meeting. Investors are currently pricing an 87% probability of that outcome.

We may face some uncertainty in 2025, for two reasons. If the unemployment rate does not move much higher and stays below the Fed’s own projection of 4.4% (for 2024 and 2025), they are going to take it as a positive, i.e. less risk to their employment mandate. However, for idiosyncratic reasons (housing and stock prices), inflation could stay elevated over the next few months, pushing the Fed to pause on rate cuts.

The risk is that the Fed takes an extended pause, even as rates stay on the higher side and adversely impact cyclical areas of the economy like housing, manufacturing, and business investment. That does not mean a recession is likely, but it is a scenario where we get more volatility as the economy navigates monetary policy that is tighter than it needs to be.

Be Aware of Cybercrimes During the Holiday Season

While scammers and cybercriminals are always on the take, people tend to be particularly vulnerable to fraud amid the whirlwind of winter holiday shopping, giving, and travel. In a recent survey, 82 percent of participants reported they had experienced online scams from

“Participants are encountering a deceptive advertisement to receive a fake shipment notice or request from a fraudulent charity.”

Jennifer Sauer, AARP Research

During 2023, losses from internet crime totaled $12.5 billion. It is a staggering sum—and may wildly underrepresent the actual amount taken.

“When the FBI recently infiltrated the Hive ransomware group’s infrastructure, we found that only about 20 [percent] of Hive’s victims reported to law enforcement.”

The FBI’s 2023 Internet Crime Report

__Common 2024 holiday scams __

In 2024, cybercriminals have become more aggressive and more devious, according to the FBI. The top schemes this holiday season include scammers:

• Posting websites and social media ads offering goods at unusually low prices, • Soliciting donations for fake charities, • Encouraging “investment” through phony cryptocurrency platforms, • Selling fake gift cards to be used for donations or time-sensitive purchases, and • Offering fake gift cards and event tickets on social media to steal personal data.

Here is how to protect yourself

Being aware of the risks is the first step toward protecting yourself from cybercrime. The FBI and Lars Daniel of Forbes offered tips for protecting yourself this holiday season They include:

• Resist temptation. Do not click on links received via e-mail, text, or messaging apps. If you receive a communication that a delivery has been delayed or there was an issue with a payment or something else has happened, do not click on the link provided. Go to the company’s website or app to check.

• Verify before sharing, donating, or paying. If you receive a communication from a charity or financial institution you know, take time to verify the contact is truly from the organization. Cybercriminals can fake real numbers on caller ID and send messages that lead you to fake websites. One way to verify is to contact the organization directly with a phone number or email found on its official website, an account statement, or the back of a credit or debit card.

• Be wary of urgent requests. Holidays are often pressure-filled. Scammers often create a false sense of urgency, encouraging people to act without thinking carefully. Before you respond to an urgent and unexpected request, take time to think, research, and verify. Also, remember that government and law enforcement agencies will never ask that payments be made over the phone, via email, or through gift card purchases.

Any time you are asked to share personal information, think carefully about who is asking and whether they should have the information. If you have any questions about how to protect yourself this holiday season, please contact us.

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 12, 1980: Da Vinci Notebook Sells for Over $5 Million

On December 12, 1980, American oil tycoon Armand Hammer paid $5,126,000 at auction for a notebook containing writings by the legendary artist Leonardo da Vinci.

The manuscript, written around 1508, was one of some 30 similar books da Vinci produced during his lifetime on a variety of subjects. It contained 72 loose pages featuring some 300 notes and detailed drawings, all relating to the common theme of water and how it moved. Experts have said that da Vinci drew on it to paint the background of his masterwork, the Mona Lisa. The text, written in brown ink and chalk, read from right to left, an example of da Vinci’s favored mirror-writing technique. The painter Giuseppi Ghezzi discovered the notebook in 1690 in a chest of papers belonging to Guglielmo della Porto, a 16th-century Milanese sculptor who had studied Leonardo’s work. In 1717, Thomas Coke, the first earl of Leicester, bought the manuscript and installed it among his impressive collection of art at his family estate in England.

More than two centuries later, the notebook—by now known as the Leicester Codex—showed up on the auction block at Christie’s in London when the current Lord Coke was forced to sell it to cover inheritance taxes on the estate and art collection. In the days before the sale, art experts and the press speculated that the notebook would go for $7 to $20 million. In fact, the bidding started at $1.4 million and lasted less than two minutes, as Hammer and at least two or three other bidders competed to raise the price $100,000 at a time. The $5.12 million price tag was the highest ever paid for a manuscript at that time; a copy of the legendary Gutenberg Bible had gone for only $2 million in 1978.

Hammer, the president of Occidental Petroleum Corporation, renamed his prize the Hammer Codex and added it to his valuable collection of art. When Hammer died in 1990, he left the notebook and other works to the Armand Hammer Museum of Art and Cultural Center at the University of California at Los Angeles (UCLA). Several years later, the museum offered the manuscript for sale, claiming it was forced to take this action to cover legal costs incurred when the niece and sole heir of Hammer’s late wife, Frances, sued the estate claiming Hammer had cheated Frances out of her rightful share of his fortune. On November 11, 1994, the Hammer Codex was sold to an anonymous bidder–soon identified as Bill Gates, the billionaire founder of Microsoft–at a New York auction for a new record high price of $30.8 million. Gates restored the title of Leicester Codex and has since loaned the manuscript to several museums for public display.

Weekly Focus

You will never find an insurer saying, ‘I do not believe in climate change.

John Neal, Lloyd’s of London CEO

No ship sets out to be a shipwreck

Joan Wickersham, American Author