Portfolio Manager Commentary

December 15, 2024

Economic Outlook

The Markit PMI Manufacturing Index increased to 48.4 for November, as inventories and employment rebounded. The ISM Services PMI came in at 52.1 for November, missing forecasts by around 6%. During the same period, the NFIB Small Business Optimism Index sharply increased to 101.7, the first reading since early 2021 that sits above the 50-year average. The Producer Price Index rose 0.4% month over month in November. Producer prices have risen 3% from a year ago, the biggest rise since February 2023. The Consumer Price Index rose by 0.3% month over month. Consumer prices have increased 2.7% annually, rising for the second consecutive month. The week ahead features several key economic data releases. New releases include Industrial Production and Capacity Utilization on Wednesday. The average interest rate for a 30-year fixed rate mortgage is 6.60%.

Fixed Income

The current federal funds target rate is 4.50-4.75%. The 10-year yield is currently 4.38%, 15 basis points above the 2-year yield of 4.23%. The U.S. Treasury yield curve continues to flatten as ultra-short duration bond yields fall in response to the FOMC’s rate-cutting cycle. Some worries regarding the long-run inflation rate persist, which may explain increases in 10-year and 30-year bond yields. The options market has fully priced in a 25 bps rate cut at the FOMC meeting this week. The Committee will announce its updated federal funds target rate on December 18, 2024. Looking ahead, there is a consensus view for no change to the target rate at the January FOMC meeting as the Committee processes recent economic data.

Yield Curve

Current Generic Bond Yields

Equity

Since the start of December, the U.S. stock market has exhibited mixed performance. The S&P 500 index remained relatively flat, but still near all-time highs. At the time of writing, the Dow Jones Industrial Average is experiencing a seven-day losing streak, its longest in several years. In contrast, the NASDAQ Composite achieved new record highs, driven by gains in major technology stocks. Consequently, market breadth has deteriorated in recent weeks, with only 31% of S&P 500 stocks outperforming the index thus far in 2024. Investors are now focusing on the Federal Reserve's upcoming meeting, as expectations for the rate cut path in 2025 become more significant.

Year to date, the best performing sectors have been Communication Services (+43.10%), Information Technology (+38.46%), and Consumer Discretionary (+35.44%). The worst performing sectors this year have been Health Care (+3.07%), Materials (+3.74%), and Real Estate (+5.72%). On a total return basis, the Russell 1000 Growth Index has increased 37.38% year to date, while the Russell 1000 Value Index has returned 18.04% over the same period.