Market looks to close out 2024 on up note
E*TRADE from Morgan Stanley
Despite a full lineup of earnings announcements, economic data, and geopolitical disruptions, November was arguably a one-story month for the US stock market.
It ended with the S&P 500 sitting on its biggest year-to-date return since 2013, as investors pushed the market to new record highs in the wake of the November 5 election:
Source: Power E*TRADE. (For illustrative purposes. Not a recommendation. It is not possible to invest directly in an index.)
The distribution of gains highlighted a risk-on mindset. Small-cap growth stocks, along with the consumer discretionary and financial sectors, were big winners as the market appeared to embrace its “animal spirits” and bid up potential outperformers under a Republican-controlled White House and Congress.
The gap between domestic and international equites widened in November. Both emerging and developed markets fell last month, with weakness particularly evident in China, Korea, Latin America, and Europe. Year to date, the S&P 500 is up roughly three times as much as the MSCI Emerging Markets Index, and more than four times as much as the MSCI Developed Markets Index.
Bond prices rose last month as yields retreated. Bond yields, which move in the opposite direction of prices, pulled back in the latter half (and especially the final week) of November after touching their highest levels since early July. The benchmark 10-year Treasury yield finished the month 11 basis points lower at 4.17%.
Data source: Power E*TRADE and FactSet. (For illustrative purposes. Not a recommendation. It is not possible to invest directly in an index.) Note: crude oil, gold, and U.S. Dollar Index data reflect spot-market prices. BPS (basis point) = 0.01%. MSCI Index of Developed Markets and MSCI Emerging Markets Index represent “total-return” performance (index change including dividend reinvestment).
The election has been settled, but policy is still TBD. Investors are facing “policy uncertainty” according to Morgan Stanley Wealth Management. Regardless of how issues such as immigration, tariffs, deregulation, and taxes ultimately play out, new market leadership could emerge in 2025. In addition to eliminating (via tax-loss harvesting) heavy concentration in the “Magnificent Seven” and other recent “Trump trade” outperformers, the strategists favor financials, energy, and residential real estate, along with domestically focused industrials and branded consumer-goods names.1
Proposed tariffs could slow the US economy—but increase inflation first. Morgan Stanley & Co. economists think the Trump administration will increase the use of tariffs (especially on China), phasing them in over the course of 2025 and pushing inflation higher. They expect the eventual slowdown in economic growth will probably get backloaded to the end of 2025 and into 2026.2
Meanwhile, current economic strength may slow the Federal Reserve’s rate-cutting campaign. Despite some minor stickiness in some of last month’s inflation data, the US economy continued to exhibit stability and strength, underpinned by a robust labor market. The Fed trimmed rates by 0.25% last month and is still on track to deliver another cut on December 18, but as Fed Chairman Jerome Powell said in mid-November, “The economy is not sending any signals that we need to be in a hurry to lower rates.”3
We could be in the early stages of a large, multi-year increase in mergers and acquisitions.
Insight of the month: Early innings for M&A resurgence? The core drivers of a large and sustained increase in mergers and acquisition activity remain intact, according to Morgan Stanley & Co. strategists. Despite a pickup this year, current M&A levels are still relatively low historically, the overall economic backdrop remains favorable, certain policy uncertainties were resolved by the election, and “wide-open capital markets” provide the ability to finance deals.4
December market patterns. The S&P 500 just wrapped up its seventh-largest January-November return since 1957. December has been a so-so month for US stocks over the past decade, with the S&P 500 posting a positive return six times and suffering large sell-offs in 2018 and 2022. Longer term, though, it’s been one of the most reliably bullish months of the year, positive in 49 of the past 67 years (73%).5
Key December dates: Employment Report (12/6), CPI (12/11), PPI (12/12), retail sales (12/17), Fed interest rate decision (12/18), GDP (12/19), PCE Price Index (12/20).
1 MorganStanley.com. Global Outlook: What’s Ahead for Markets in 2025? 11/18/2024.
2 MorganStanley.com. The GIC Weekly: Considering Constraints. 11/25/24.
3 CNBC.com. Powell says the Fed doesn’t need to be ‘in a hurry’ to reduce interest rates. 11/14/24.
4 MorganStanley.com. The Beginning of an M&A Boom? 11/15/24.
5 Figures reflect S&P 500 (SPX) monthly closing prices, 1957–2023. Supporting document available upon request.
Because of their narrow focus, sector investments tend to be more volatile than investments that diversify across many sectors and companies. Technology stocks may be especially volatile. Risks applicable to companies in the energy and natural resources sectors include commodity pricing risk, supply and demand risk, depletion risk and exploration risk. Health care sector stocks are subject to government regulation, as well as government approval of products and services, which can significantly impact price and availability, and which can also be significantly affected by rapid obsolescence and patent expirations.
Yields are subject to change with economic conditions. Yield is only one factor that should be considered when making an investment decision.