December 2024 Client Letter

November was a broadly fruitful month for investors as stocks saw solid gains. Specifically, the S&P 500 advanced more than 5% making it the best month for the index so far this year. Several factors played into the stock market’s continued move higher. The U.S. economy continued its steady run of solid growth. The Federal Reserve (Fed) cut interest rates as expected, providing some reassurance about the outlook for inflation. Third quarter earnings season was solid, revealing that corporate America remains strong. The combination of election clarity, prospects for deregulation and the potential for lower taxes from the incoming administration may have also played a role. Market leadership was also encouraging, as small caps and economically sensitive consumer discretionary and financial sectors led, which could bode well for further gains.

More good news for markets came over the Thanksgiving holiday weekend with promising data for the all- important start to the holiday shopping season. According to Mastercard’s SpendingPulse (which measures both online and in-store retail sales), sales rose a solid 3.4% on Black Friday, compared to 2023 levels. Most of the sales growth was driven by a 14% increase in online transactions. Many consumers are seemingly still enjoying plenty of spending power thanks to rising wages, low unemployment, and high stock prices – especially those who refinanced mortgages during the pandemic. Add in the recent dip in gas prices and it’s likely the shopping momentum will continue through year end.

Looking ahead, more gains could be coming. History reveals that stocks tend to produce above-average gains in December and rise more often than they fall. It is our opinion that in 2025, continued economic and earnings growth, lower inflation, and potentially more Fed rate cuts position the stock market for the potential of further gains. If artificial intelligence investments boost productivity, as many expect, a good year could get even better.

Of course, there are risks. The last bit of excess inflation has been tough to wring out, so markets may need to further reduce expectations for rate cuts. Deficit spending could put upward pressure on long-term interest rates. Tariffs will likely trim company profit margins and be met with additional retaliation. Geopolitical threats cannot be dismissed even after a temporary cease-fire between Hezbollah and Israel and talks of a territory- for-peace deal in Ukraine. Finally, some measures of investor sentiment are getting stretched, so fully allocated investors may want to wait for a dip before adding to equity positions.

As always, please let me know if there is anything that I can do for you or someone that you care about.

Sincerely,

Ed