A mean one, Mr. Grinch!

Magnificent is defined as “something that is grand, impressive, or awe-inspiring.” At the beginning of the year, the prospect of a recession still seemed to lurk in all the data. Instead, it was a magnificent year where the market climbed the wall of worry while the hoped-for soft landing came ever-nearer into view. The S&P 500 has closed at a new high 57 times this year—a record. That’s 24% of all trading days! It’s no wonder that a recent sentiment index found consumers never so bullish for the next twelve months’ market returns. Only seven times since 1928 have there been 50 or more new highs in a year. Most of those golden years have been followed by middling to negative returns. Wednesday, the day the Fed announced its reduced rate-cut expectations, was one of the weakest days for the market in recent years, with 95% of NYSE issues lower. Wednesday’s massive 74% VIX spike (the second-highest single day surge ever) is the sort of thing often seen at market lows. Hmm. The autumn rally was great for the S&P 500 and for the Magnificent 7, whose earnings continue to undergird their strong performance. Mega cap tech makes up one-third of the S&P market cap and nearly a quarter of next year’s expected earnings. But, with bond yields elevated, we are back to the narrow breadth that has bedeviled the market before. From a seasonal perspective, the next two weeks are often strong. As for 2025, since 2005, the first year of a president’s term has been on average the best year. But January could bring a much-needed 10% correction. The East and Gulf Coast dockworkers, who tabled their strike in the runup to the election, are due to go back on strike January 15 if terms cannot be reached. The Teamsters are currently striking against Amazon. The government, too, looks like it might shut down (though the market usually shrugs that off). Is Musk the new Bond Vigilante? Is the fate of equities now in the bond market’s hands?

So, there’s a lot that could go wrong, and Mr. Grinch’s first name may very well be Jerome. The Dow has had a long losing streak, which seems odd if all is well. Breadth shrank, as S&P decliners outnumbered advancers for 12 straight days, the most since 2001. And the Federal Reserve provided a justification for the gloom by indicating just two rate cuts next year. Fed Chair Powell, in talking about his task, said it was like walking through a dark room with furniture in it, a domestic update of his line at Jackson Hole about “navigating by the stars under cloudy skies.” One possible inference: we may no longer be all that far from the neutral rate. The risk-on Fed has, for now, been replaced by an uncertain Fed. One onlooker saw the proceedings as a sign that the rather dovish Powell is bending to a hawkish FOMC, with the result that his remarks at the press conference didn’t always add up. For instance, Powell listed all the indications of a softening labor market but then maintained that there’s no need to keep cutting rates at a brisk pace. It looks like the Fed’s shift to an expectation of two cuts was mainly motivated not by the data but by fear of inflation from Trump’s promised tariffs. Meantime, the 10-year yield has jumped from its early December level of 4.15% and now stands at 4.5% or so, not far from its springtime highs for the year. A level above 4.5% is likely to spell trouble for the equity market. It’s been a year driven by momentum stocks. High momentum stocks often have a volatile January. And the winter has a tendency to show sticky inflation in the numbers. A year ago, this prompted the Fed to slow its plans, and that might well happen again.

Mr. Grinch has a chance, then, but this is America, and we may be able to outshop him. Christmas tree sales are strong, and airlines are reporting strong demand for leisure travel. Same-store traffic in the malls showed improvement on both a monthly and yearly basis. Online sales for Black Friday weekend were up a nominal 8.6% y/y, the best improvement in four years. Real wage gains have been strong and nonlabor income (rent, dividends, etc.) is at a record. The wealth effect appears to be loosening the purse strings. Many Boomers, for instance, are retired, but with $80 trillion of the nation’s $154 trillion household wealth, they are, as a group, in a position to spend. Meanwhile, business formation applications in November were near a record, which should drive hiring, research and development, and capital expenditures. Small business optimism increased a record amount in November. As for the awe-inspiring Magnificents, half of all capital spending in the US now goes to high tech. Merry Christmas!

Positives

• Shop around the clock Retail sales rose 0.7% in November, buoying upward revisions to previous months. Sales of vehicles and parts drove the move, increasing 2.6%. Online sales rose 1.8% m/m and 7.9% y/y to a new record high. Not all was rosy, as spending at restaurants and bars fell by 0.4% while grocery store sales dropped by 0.2%. 
• Services strength The services PMI rose 2.4 points in December to 58.5, against expectations of 55.8. This was the highest since late 2021. The S&P Global services PMI has stayed above 50 since February 2023. New business conditions became yet more expansionary, and the employment index rose into expansion territory after four months under breakeven.
• A pause can be bullish The Federal Reserve cut rates by a quarter point in December but indicated that only two cuts are likely next year. The Bank of Japan, which had been expected to hike rates to keep inflation low, surprised observers by issuing a dovish hold on rates. The Bank of England also held rates unchanged but fretted about risks to growth as several members voted to cut.

Negatives

• Industrial production slows US industrial production fell by 0.1% in November, the third monthly drop in a row as last month’s decline was revised yet lower. Capacity utilization fell to 76.8%, matching the lowest mark since April 2021. Aerospace production was weak, despite the conclusion of the Boeing strike. Automotive production, however, increased 3.5%. Separately, the third estimate of Q3 GDP shows that it grew 0.3%, to a robust 3.1% annual rate.
• Housing struggles, sort of The housing market showed weakness in the multifamily segment, but single-family starts and permits were positive m/m. Existing home sales rose in November, but this may be the result of a drop in rates earlier this fall. The recent rise in rates could hold this rally in check.
• Manufacturing remains mired in contraction The New York Fed’s Empire Manufacturing Index fell in December, suggesting that November’s gains had been an attempt to get ahead of tariffs. The Philadelphia Fed’s manufacturing survey showed a retreat as well. S&P Global’s US manufacturing PMI fell in December, further indicating that tariff uncertainty is taking a toll.

What Else

For Boomers, cash is king Higher-for-longer short rates may benefit money market funds at the expense of equities and bonds. The $6.8 trillion worth of “dry powder” may remain where it is unless FOMO sets in or the FOMC sends short rates down further.

Santa in the USA The first department store Santas appeared in the nineteenth century. Some say it was at Macy’s in 1861 while others point to Massachusetts dry goods merchant James Edgar in 1890. Also, Santa’s costume wasn’t a settled matter until the late 1800s. As for photos, that began in 1943 when a Seattle newspaper photographer saw an opportunity in the line of kids waiting to talk to Santa.

Busy guy, Saint Nick! Santa Claus would have to make stops at 822 homes per second to deliver presents to the entire planet on Christmas Eve, requiring travel at 3,000 times the speed of sound. Santa Claus was first given a pilot’s license by Assistant Commerce Secretary William McCracken in 1927, the first year when they were available.