End of 2024

During the holiday-shortened week of December 23 to December 27, 2024, U.S. stock markets exhibited mixed performance, with major indexes experiencing gains earlier in the week but facing declines by week's end.

Weekly Performance:

S&P 500 Index: Despite a 1.1% drop on Friday, the S&P 500 managed a modest gain of 0.7% for the week, bringing its year-to-date increase to 25.2%. Associated Press

Dow Jones Industrial Average: The Dow fell 0.8% on Friday but ended the week up 0.4%, contributing to a 14.1% rise for the year. Associated Press

Nasdaq Composite: The tech-heavy Nasdaq declined 1.5% on Friday yet achieved a weekly gain of 0.8%, with a substantial year-to-date increase of 31.4%. Associated Press

Key Influences:

Tech Sector Declines: Significant losses in major technology stocks, including Tesla (-5%), Nvidia (-2.1%), and Microsoft, contributed to the market's downturn on Friday. Financial Times

Year-End Profit-Taking: Analysts attribute the late-week declines to investors engaging in year-end tax selling and profit-taking, common during periods of low trading volumes. Reuters

Federal Reserve Outlook: The Federal Reserve's projections, indicating fewer interest rate cuts than previously expected for 2025, led to increased long-term borrowing costs, impacting high-growth stocks. Financial Times

Notable Stock Movements:

Super Micro Computer (SMCI): Shares fell 5.2% amid concerns over accounting practices. Investopedia

Palantir Technologies (PLTR): The stock declined 3.7% following its addition to the Nasdaq 100 Index. Investopedia

Lamb Weston Holdings (LW): Shares rose 2.6% due to activist investor activity. Investopedia

Treasury Yields:

The yield on the 10-year Treasury note increased to approximately 4.6%, the highest since May, influencing investor sentiment and contributing to the decline in tech stocks. Investors.com

Market Outlook:

Despite the recent volatility and December's atypical decline, the S&P 500 has achieved a gain of over 25% for the year, marking the first consecutive annual gain of over 20% since 1997-1998. Associated Press

Investors remain cautious as they monitor economic indicators, corporate earnings, and potential policy changes under the incoming administration, all of which could influence market performance in early 2025.

THE S&P 500:

Is now down 1% for the month. According to Dow Jones Market Data going back to 1950, a December decline is a rarity: The S&P 500 was positive in the month 56 times over the past 75 years.

With the trading days of 2024 behind us, it’s safe to say it was a stellar year for stocks. For some investors, it may feel like the market has been running too hot. But if we look at just bull market years since 1932, the average annualized return for U.S. stocks is 23%. That puts performance in 2023 and 2024 well within the historical norm.

To be fair, this does not mean that 2025 is destined to be a great year. There are key factors to watch in the new year, four of which I detail below for investors.

1. What Will the Path of Interest Rates Actually Look Like?

The Fed has a lot of moving parts to navigate in 2025.

At the moment, the Fed’s core concerns—inflation and the labor market—appear to be stable. The unemployment rate is hovering in a range just above 4%, and the labor force has remained about the same size in the past quarter.

The possibility of mass deportations and the almost certain reversal of existing  immigration policies are poised to tighten the labor market (increasing job openings relative to unemployed workers), which could increase wage pressure. It will be a factor for the Fed to watch.

Then there’s inflation. The latest CPI print showed prices rising 2.6% year-over-year in October, a slight pickup from September’s 2.4% pace. On a monthly basis, prices increased at a seasonally adjusted rate of 0.2%, in-line with expectations. Core prices, which strip out volatile food and energy prices, rose 3.3% year-over-year and 0.3% from October. In short, the inflation fight is in a relatively solid place, but it’s not yet won.

As it stands today, the Fed has cut rates by 100 basis points as the economy has continued growing at a solid pace, which is generally the opposite of what you’d expect to see. The incoming administration has promised fiscal stimulus in the form of tax cuts, and other policies like deregulation are designed to spur growth. That has thrown the path of interest rates into question, as evidenced clearly by Federal Reserve Chairman Jerome Powell’s December statement that “we’re going to be cautious about further rate cuts.”

2. Turning Ideas into Policies

Long-time investors know that when it comes to policies, it’s important to focus on what politicians and parties do, not what they say. With Republicans taking control of Congress and the White House, it’s reasonable to expect that many of the policy proposals from the campaign trail will be pursued. But whether they’re enacted is a different story.

One example is tariffs. President-elect Trump has floated the idea of implementing a 60% tariff on all imports from China and up to 10% on imports from other countries. In response, China has restricted the export of certain essential materials, some of which are critical components in the production of semiconductors, satellites, and night vision equipment. President-elect Trump has also suggested a 25% tariff on goods from Mexico, the U.S.’s largest trading partner, as well as on Canadian imports. Exchanges like these insert uncertainty into global trade relations, but investors should remain patient to see how it actually plays out.

We could also see significant changes in the regulatory landscape. President-elect Trump is expected to appoint new heads for agencies such as the Federal Trade Commission and the Justice Department’s antitrust division, which oversees mergers and acquisitions, with nearly 40% of the S&P 500 market cap under scrutiny. These leadership shifts, along with broader changes in Washington, are expected to mark a new era of deregulation. This is generally supportive of earnings and economic growth, but again, investors should take a wait-and-see approach for now.

3. A Broadening of Earnings Growth

In 2023 and 2024, a lion’s share of the market’s strong performance was fueled by some of the U.S.’s largest companies, namely the “Magnificent Seven” mega-cap technology stocks. As of November 30, the Magnificent Seven were up +41% year-to-date versus only 18% for the remaining 493 stocks. That means just seven stocks accounted for an astonishing 47% of the index’s gains.

These strong market returns have come on the back of strong earnings growth. The Magnificent Seven have grown their earnings by 40% compared to the ‘other 493 stocks’ 2% earnings growth. 2025 could see a change in this dynamic.

We expect the ‘other 493’ stocks in the S&P 500 to grow earnings by 5x relative to 2024, while Magnificent Seven earnings decelerate. This ‘broadening’ of earnings growth could trigger some rotation in the market, in our view, which may benefit small- and mid-cap stocks over large-cap stocks and perhaps favor non-Technology sectors.

4. Expecting Lower Yields on Cash

Though the Fed has indicated its intent to be more cautious about lowering rates, we’ve already seen 100 basis points in cuts—which has led to yields on cash declining in 2024. In my view, we could see cash rates come down even further in the new year, which for investors means seeing cash underperform other asset classes. Indeed, in 10 of the last 12 twelve cutting cycles, stocks and bonds have outperformed cash.

This is not to say that investors should move all of their cash off the sidelines and into other asset classes. As I’ve written many times before, it’s crucial to keep about one year’s worth of income needs in cash, for emergency purposes. But beyond those levels, I’d be looking to deploy that cash into asset classes that have the potential for higher returns, like stocks and bonds.

Boeing and 6 More Contrarian Stocks for 2025

The meek may inherit the earth, but in the stock market, winners usually keep on winning. Still, there’s money to be made betting on some of 2024’s biggest losers. As much as we like to be contrarians, we know that markets are generally a momentum game. Look no further than the Invesco S&P 500 Momentum exchange-traded fund, which has gained 47.2% this year, compared with the S&P 500 index’s 25.2% rise. The fund’s biggest positions include Amazon.com, Nvidia, Broadcom, Meta Platforms, and Berkshire Hathaway. When markets are trending higher, buying stocks with strong momentum on the dips is generally the way to go.

But we are contrarians. We like thinking about what could go wrong for the stock market’s biggest winners, and we really love figuring out what could go right for its biggest losers. Sometimes that leads us to make mistakes—recommending Albemarle this year wasn’t one of our finest moments —but it can really pay off when we get it right. PayPal Holdings, for instance, has gained 41% since we highlighted it in March.

And there look to be plenty of contrarian picks to make as the year comes to a close. About a third of the companies in the S&P 500 were in the red as of the close of Dec. 23, and just 142 had topped the index. Many of them underperformed for a reason— Walgreens Boots Alliance, which is in talks to go private; potato product maker Lamb Weston, which recently ousted its CEO after reporting a surprise loss; and Paramount Global, which is merging with Skydance Media, among them—but it still leaves plenty of stocks to sort through.

Where to begin? JC O’Hara, chief market technician at Roth MKM, recommends looking for stocks that are “massively oversold” and approaching levels that could serve as “zones of support” for a rebound. He found 28, including household names like Nike, Ulta Beauty, Merck, and Boeing. Others are less well known, but intriguing: payments company Global Payments, medical-device company Zimmer Biomet Holdings, and analog semiconductor manufacturer Skyworks Solutions. Ulta looks particularly interesting. It started off the year with a bang, reaching $567.18 a share by the middle of March. From there, it was a long ride down, starting with a March earnings report that featured lackluster guidance. From March 13 through Aug. 12, the stock dropped 43%. Then a Berkshire Hathaway filing revealed that the company had bought shares, and the stock has bounced 36% since then.

Things do seem to be looking up. Placer.ai notes that it was among the big winners of Super Saturday, the last shopping day before Christmas, with traffic up 50% from 2019, while Deutsche Bank notes that the company’s Dec. 6 earnings report revealed growth at stores open at least 13 months—so-called same-store sales—something that “refuted the bear case that it is a share donor in the beauty space.”

Betting on a Boeing bounce sure feels contrarian. Yes, about 55% of analysts still rate the stock a Buy, but that’s the fewest since June 2021. And the company has a new CEO in Kelly Ortberg, who will try to do what Dave Calhoun couldn’t. Early results are looking good. The machinists strike ended, while the company resumed making the 737 Max earlier this month.

A lot still needs to go right from here: The company has to accelerate production; quality control needs to improve; and Boeing is still trying to acquire Spirit AeroSystems, which makes its fuselages. It’s all very complicated and loaded with risk, but the upside potential if the company can avoid the potential pitfalls is undeniable.

Sure, none of these stocks look like slam dunks, and even O’Hara says some “are not ‘quite there’ yet” and could require patience. That’s what makes being contrarian fun. If it were easy, it would be called momentum investing.

Happy & Healthy New Year to all,
Richie

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DATA: Barron’s print edition page 21 12/30/24 Market Week Teresa Rivas

Paragraph: one Market Recap online 12/23/24- 12/27/24 ChatGPT As stated above

Paragraph: two Barron’s print edition page 21 12/30/24 The Trader Teresa Rivas

Paragraph: three Mitch on the Markets online edition 12/28/24 4 Key Factors to Watch in 2025

Paragraph: four Barron’s print edition page 22 12/30/24 The Trader Boeing and six more Contrarian Stocks for 2025 Ben Levisohn

Paragraph: Closing remarks Richie Naso