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The December correction pushed into January for one more week before snapping back. I believe that a major contributor to the ‘broken’ December was the way that our holidays landed in 2024. Whenever Christmas and New Year’s Day fall on Wednesdays, the last two weeks of the year get chopped up by market holidays. With financial markets closed for the holidays right in the middle of each week, it is difficult to ‘mount an offensive’ in the last two weeks. That leaves markets more vulnerable to sell programs associated with tax-loss harvesting. Also contributing to the ‘broken week’ series was the market closure for Jimmy Carter’s funeral. That left three weeks, right at year’s end, when financial markets became stranded by the side of the road.
Equity markets were already digesting their ample gains from November when the Federal Reserve announced on December 19th that inflation was proving to be more stubborn than anticipated. That was not good news for stocks, but it was even worse news for bonds. Bond markets had been operating under unusual conditions for years while the Federal Reserve held short-term interest rates close to zero. When the Fed finally started letting short-term rates rise naturally, it was good news for investors and well-received by both stock and bond markets. In December, when the Fed tapped the brakes on future interest rate changes for 2025, its timing spoiled what is normally a profitable month for equity markets.
Equity markets largely recovered in January and, interestingly, the leadership has rotated back to large and giant cap companies. The December correction had run its course by mid- January, followed by a nice rally through last week. Equity markets broke short-term uptrends in the course of the year-end corrections, which leaves them in the middle of a wide trading range. The long-term Bull Market for equities, which began in October of 2022, is still alive and well. Recently reported corporate earnings reports for the fourth quarter of 2024 have been very acceptable. Additionally, the gross domestic product (GDP) report for the U.S. economy for the 4th quarter reflected an annualized increase of +2.3%. So, the Bull Market is young and the U.S economy is expanding. This should be a good recipe for equities.
Bond markets have a different set of adjustments to consider. Inflation numbers have come down dramatically in the past year, from over 9% to about 3%. However, the Fed’s target is 2%, which is proving to be more challenging. We now know that the Fed’s reaction to these persistent inflation numbers will be to hold short-term interest rates higher and steadier for longer. This is not good news for bond market investors who have been positioning portfolios for lower short-term interest rates and lower inflation. Bond markets are not as flexible, nor as liquid, as equity markets. This contributes to their stability during period of high volatility. The trade-off is that bond market investors need more time to implement their strategies. The Bloomberg U.S. Aggregate Bond Index (AGG) is in both short and intermediate-term downtrends. Our focus has shifted once again to short-term, floating-rate bonds.
Stock market leadership, which had been shifting away from large cap and giant cap companies, rapidly returned to this group in January. They were accompanied by continued interest in the artificial intelligence (AI) theme in particular, and internet and technology-related industries in general. Normal corrections aside, the Bull Market is firmly in place. Bond markets appear to have circled their wagons once again around short-term, predictable outcomes. The linchpin for bond markets has become the Federal Reserve and their outlook for inflation. Hopefully the Fed can continue to manage a soft landing for the economy.
Edward D. Foy, Manager, SELECTOR® Money Management, Chief Investment Officer, Foy Financial Services, Inc.
© 2025 Edward D. Foy. [email protected], www.foyfinancial.com.
Sources: StockCharts, Morningstar, Stock Trader’s Almanac.