We only have four light-volume trading days left in 2024, so last week’s downdraft postponed the Santa Claus rally, but the second half of December is historically the year’s best two-week span, so we still might see some powerful up-moves before the year ends. The S&P 500 fell 2% last week, while the 10-year Treasury bond yield rose 42 basis points (from 4.15% to 4.57%) over the last two weeks, on fears of higher inflation and the debt ceiling battle. Part of last week’s market malaise also came from Fed Chair Powell’s waffling remarks in the FOMC statement and following press conference.
In addition, President-elect Trump and Elon Musk caused the House of Representatives to scramble to throw out some of the “pork” that was added to their spending bill. Clearly, Trump prefers that any major shutdown occur while Biden is still in office, so Trump can seem to rescue the nation. Trump has said he would like to eliminate the debt ceiling, so perhaps a government shutdown would have helped deliver that wish.
Here are the most important market news items and what this news means:
- Qatar is threatening to cut off LNG shipments to the eurozone over legislation that will penalize companies that fail to meet set criteria on carbon emissions and human and labor rights. Frankly, this is a great opportunity for the U.S. to step in and fill this LNG void if Qatar cuts off LNG shipments. Russia has been exporting more LNG to the eurozone than the U.S. since May because the Biden Administration was striving to restrict LNG expansion due to environmental concerns. Frankly, the U.S. is going to score a lot higher than either Qatar or Russia on carbon emissions and human and labor rights, so hopefully, under Trump 2.0, LNG exports will boom.
- Nissan and Honda have announced that they have commenced merger talks to create the third-largest automotive manufacturer. What is hindering the entire automotive industry is all the electronics that many governments are now requiring, such as lane assist and collision avoidance systems. The problem with all these requirements is that each car has to have its own “firewall” to avoid computer hacking. All these new electronics cost money and raise the cost of new vehicles. Nissan has a lead over Honda in EVs and trucks. Honda has a great engineering and quality reputation, with lots of loyal customers. Overall, this potential merger will be interesting and merge entirely different cultures.
- President-elect Donald Trump is throwing out a lot of interesting ideas that most folks have not thought of. First, he wants to buy Greenland from Demark as an “absolute necessity” for national security reasons. Second, President-elect Trump is demanding that Panama reduce its transit tolls, especially on U.S. Navy ships. Panama has rejected Trump’s demands and refuses to lower its transit toll for U.S. vessels. China’s growing influence in Panama may be one reason that President-elect Trump would like the Panama Canal back, so this will be an interesting confrontation.
- As a result of the chaos in Brazil, Britain, Canada, France, and Germany, plus economic growth sputtering in China as its population continues to shrink by over 2 million people per year, the U.S. remains the growth engine of the world. Falling interest rates around the world will cause an international flight to U.S. Treasuries to persist and naturally drive yields lower. As an example. China’s 10-year government bond yields fell below 1.7% this week, which is the lowest level in two decades. These low global yields will naturally cause capital flight to the U.S. and since the Fed never fights market rates, I am confident that the Fed will cut its key interest rates four times in 2025.
- A strong U.S. dollar will help to reduce the prices of imported goods. The Fed’s favorite inflation indicator, the Personal Consumption Expenditure (PCE) index, only rose 0.1% in November and 2.4% in the past 12 months. This was the smallest monthly increase in the PCE since May. When shelter costs (owner’s equivalent rent) are stripped out of the PCE, inflation is essentially running at the Fed’s 2% target rate. However, Fed Chairman Jerome Powell’s comment that the Fed’s year-end inflation forecast has “kind of fallen apart” did not inspire confidence.
In my opinion, the stock and bond market reactions to the FOMC Statement, dot plot, and Fed Chairman Powell’s press conference were grossly overdone and eviscerated all the stock market gains since the Presidential election. Fortunately, a Santa Claus rally was subsequently sparked by the November PCE report, so the stock market is rallying into Christmas and should also rally into the New Year.
