Consumer confidence dropped in December to 104.7 from 112.8 in November, and post-election optimism seems to be fading based on the cost of living and rising inflation being at the center of many households. However, the labor market remains strong at 4.2%, and GDP increased at an annual rate of 3.1% in the third quarter of 2024. According to the Conference Board, the US GDP is expected to grow by 2.7% in 2024. This is an upward revision from the previous estimate of 2.6%. November core PCE, the Fed’s preferred inflation metric, came in at 2.7%, its highest level since April 2024. The US economy is expected to end 2024 on a strong note, but growth is expected to slow to 2.0% in 2025.
What does all this mean in practical terms? As we expected and mentioned in previous articles, inflation slightly accelerated or lingered, and GDP decelerated in the fourth quarter. So far, it seems we were correct in our forecast. In this economic environment, volatility increases because Treasury yields move higher, creating investors’ anxiety. Still, the stock market does not collapse as long as inflation does not go out of control. As I mentioned throughout 2024, we are bullish in the mid and long-term and remain cautiously bullish in the short-term due to higher-than-desired volatility. Higher interest rates, or the expectation of it, create a more challenging environment for stocks.
On a positive note, the yield curve went from inverted to normal in September, with short-term yields lower than mid- and long-term yields. The significance of this move is that bond investors do not expect the economy to go into recession, and they probably expect inflation to remain under control—perhaps not where the Fed would like it to be, but not out of control either.
In the first quarter of 2025, we expect the economic cycle to move from Phase III, where inflation accelerates and GDP decelerates in the last quarter of 2024, to Phase II, where inflation and GDP accelerate together. This is called the reflationary period, during which the economy recovers, consumer expectations rise, industrial production increases, the yield curve is normal, and monetary policy bias is hawkish to prevent inflation from skyrocketing.
Despite the selloff during the second half of December, the stock market remains bullish. However, short-term prudence is advisable due to the bullish main trend of volatility combined with the bullish trend of Treasury yields. If persistent, this combination should be bad news for stocks. Our quantitative indicators show that the selloff is short-term because the bullish trend in volatility is shallow—it just began, and it is not a strong trend yet. However, this indication can change at any time, and our forecast will adjust accordingly.
Our quantitative model shows that the main trend of copper and light crude oil is bearish. Perhaps investors are anticipating lower global economic growth, which, if persistent enough, should alleviate inflation pressure. At the same time, the US Dollar is showing a strong bullish trend, and gold is short-term weakening into a bearish trend. It remains to be seen if these trends continue.
Conclusion: The US economy may be decoupling from the global economy. While the US may be entering Phase II in the economic cycle, the global economy may be heading into Phase III, where inflation accelerates and GDP decelerates. We expect the US economy to fluctuate between Phase II and III during 2025.
In the meantime, the S&P 500 Index is outperforming the eleven international bourses we follow. The rotation of capital in the US indicates that the defensive sectors and industrials, a leading sector, are lagging behind the remaining four leading sectors of the economy. Additionally, semiconductors that have been lagging since early November may be catching a bid and recovering. If this trend continues, it should be a big positive for stocks. This type of behavior adds to the thesis that the selloff in the stock market may be short-term, and the bullish trend in stocks in the US may prevail. Remember that the Federal Reserve may create confusion, generate volatility, and cause a pullback or correction in an already complacent stock market. After a strong 2024 year, a 10% correction should not be ruled out. These dynamics illustrate the complexity of financial markets and how various factors can influence bond yields, central bank actions, stock market performance, and investors’ behavior.
The daily S&P 500 Index chart below shows the index holding at its first support area between 5850 and 5900. The second support area is 5725, or 38.2% retracement of its December peak, and the third is in the 5600 area, or 50% retracement. The blue arrows indicate the index’s recovery on impressive daily volume (vertical bar) on December 20th. The first indicator below the chart shows Value Stocks underperforming Growth Stocks, which is positive for a sustainable up trend, and the second indicator shows the volatility index ($VIX), which remains relatively high. The red circles show $VIX above 20 four times since September.
The chart below shows Copper on a downtrend since May 2024 and testing support at about $4.00. The indicator above the chart shows the commodity’s negative momentum, and the indicator below shows Copper underperforming the S&P 500 Index since May. Copper is trading under the 200-day SMA (red line), 50-day SMA (blue line), and 20-day EMA (green dotted line). This combination is a clear indication of a downtrend.
The chart below shows the strong uptrend of the US Dollar (USD) since early October 2024. The currency is trading above the 200-day SMA (red line), the 50-day SMA (blue line), and the 20-day EMA (not shown). The RSI indicator below the chart shows the currency’s strong momentum, and the second indicator below the chart shows the Euro’s underperformance relative to the USD since late September.
With best wishes,
