Dec. 19th, 2024: Weekly Market Review

1. Federal Reserve reduced the benchmark interest rate by a quarter percentage point to a range of 4.25% to 4.5%, signaling a cautious approach toward future rate cuts due to persistent inflation concerns. 

This decision reflects the Fed’s commitment to achieving its 2% inflation target while navigating economic uncertainties.  Fed Chair Jerome Powell emphasized that, despite recent rate reductions, the economy’s resilience and ongoing inflationary pressures necessitate a measured pace in monetary easing. He likened the approach to “driving on an unfamiliar, foggy road,” indicating that the Fed will proceed carefully with any further policy adjustments. The Fed’s updated economic projections suggest a slower trajectory for rate cuts in 2025 than previously anticipated, with officials raising their inflation estimates for the coming year. This adjustment underscores the central bank’s focus on controlling inflation before implementing additional rate reductions. Financial markets reacted sharply to the Fed’s stance. U.S. stocks experienced significant declines, with the S&P 500 dropping nearly 3% and the Nasdaq Composite falling 3.6%. Additionally, the dollar surged to a two-year high, and yields on U.S. government bonds increased, reflecting investor concerns about the Fed’s commitment to managing inflation.  Stock and bond market reactions could be a knee-jerk reaction since the level of leverage has increased for investors.   Click onto picture below to access video. REF: Bloomberg

2. (Not Investment Advice) The integration of artificial intelligence (AI) into drug discovery is revolutionizing the pharmaceutical industry by enhancing efficiency, reducing costs, and accelerating timelines. 

Traditionally, drug development takes over a decade and costs between $1 to $2 billion. AI has the potential to cut these costs significantly and reduce discovery timelines by up to 50%, thanks to its ability to streamline target identification, predict molecular behavior, and optimize preclinical testing.

Financially, the opportunity is immense. The AI-driven drug discovery market is projected to grow from $0.78 billion in 2023 to nearly $20 billion by 2033, reflecting a remarkable CAGR of over 38%. Investment trends support this outlook—AI drug discovery startups have attracted more than $10 billion in funding since 2019, while all major pharmaceutical companies have entered partnerships with AI firms. These collaborations aim to improve success rates in clinical trials, lower failure rates, and ultimately deliver effective therapies faster.  AI’s role in drug discovery offers enormous potential, with estimated economic benefits of up to $110 billion annually for the pharmaceutical sector. However, realizing this transformation will require strategic investments, continued technological advancements, and strong partnerships between pharma and AI companies. As the industry evolves, AI promises to reshape the future of healthcare innovation.  REF: CBInsight, WSJ, TheTimes

**With the current macro-economic backdrop, below are areas we currently favor:

• Fixed Income – Short-term Corporates (Low-Beta)
• Fixed Income – Corporates High Yield as Opportunistic Allocation (Low-Beta)
• Businesses that contribute to and benefit from AI & Automation (Market-Risk)
• Small Cap & Mid Cap Stocks (Market-Risk)
• Utilities (Market-Risk)
• Healthcare & Biotechnology (Market-Risk)
• Gold (Market-Risk)
• Industrials (Market-Risk)
• Asian Innovation-related Equity (Market-Risk)

3. Both German and Japanese automakers are facing significant challenges as the global automotive industry transforms, driven by the rise of Chinese automakers and the accelerating shift to electric vehicles (EVs). 

Companies like Mercedes-Benz, Volkswagen (VW), Porsche, Toyota, and Nissan are grappling with rising costs, labor issues, and declining sales, all while contending with cutthroat competition from China’s affordable and innovative EVs.

In Germany, Mercedes-Benz plans to cut 16,000 jobs to reduce operational costs as profitability declines. Volkswagen, meanwhile, struggles with its workers’ union, which resists the necessary restructuring to remain competitive in the EV market. Premium brands like Porsche are also feeling the squeeze, as rising production costs and lower demand erode profit margins.

Japanese automakers are experiencing similar pressures. Industry leaders Toyota and Nissan have been slow to transition fully to EVs, relying heavily on their hybrid technology, which is losing ground in markets where pure EVs dominate. This delay has allowed Chinese automakers like BYD and NIO to surge ahead, particularly in Asia and Europe, with affordable EV models that appeal to cost-conscious consumers. Japanese companies are now under pressure to ramp up EV production while battling their own challenges of higher manufacturing costs, supply chain disruptions, and slowing global sales.

Chinese automakers’ aggressive pricing and rapid innovation have created a paradigm shift, forcing both German and Japanese automakers to rethink their strategies. While German manufacturers face labor tensions and restructuring hurdles, Japanese automakers struggle with technological adaptation and an overreliance on hybrids.  Automakers in both Germany and Japan face mounting pressures in a rapidly changing market. To survive, they must streamline operations, embrace EV innovation, and cut costs while addressing internal challenges. Failure to adapt to China’s dominance could see these once-leading global automakers fall further behind.  Click onto pictures below to access videos.  REF: REUTERS, WSJ

4. World Watch

4A. China is struggling with persistent deflation, driven by overcapacity in industries like manufacturing and weak consumer spending. Prices for goods leaving Chinese factories have fallen year-over-year for 26 consecutive months, dropping 2.5% in November from a year earlier, and there is little sign of them turning up again soon.  Companies are forced to cut prices, further deepening the cycle.   A key factor contributing to this deflationary environment is overcapacity in industries such as manufacturing. For instance, companies like Shandong Chenming Paper have been compelled to reduce prices to manage surplus production, inadvertently perpetuating the deflationary cycle.  In response, Beijing has signaled plans for proactive fiscal policies and a looser monetary stance in 2025, including increased government borrowing to stimulate growth. However, economic indicators like slowing retail sales and investment highlight ongoing challenges. While these measures may provide short-term relief, analysts stress that long-term recovery requires comprehensive reforms in the property market, fiscal systems, and social welfare. Without structural changes, Beijing’s efforts to reverse deflation may fall short.  Click onto picture below to access video.  REF: WSJ

4B. Moody’s downgraded France’s credit rating from Aa2 to Aa3, citing concerns over the nation’s public finances amid ongoing political fragmentation. This downgrade indicates an increased risk of France defaulting on its debt obligations.  The political instability contributing to this financial uncertainty includes the recent ousting of Prime Minister Michel Barnier over proposed austerity measures. His successor, François Bayrou, faces the immediate challenge of forming a government capable of passing a budget without inciting a no-confidence vote.  Economically, France’s growth has decelerated, with projections indicating a slowdown to approximately 1% for the current year. Simultaneously, the national debt has escalated to 112% of GDP, positioning France among the highest debt-to-GDP ratios in the Eurozone. Moody’s expressed skepticism regarding France’s ability to implement effective fiscal consolidation, suggesting that political divisions may impede necessary budgetary reforms. This situation could lead to a “negative feedback loop,” where rising budget deficits and increased borrowing costs further weaken the nation’s financial standing. Click onto picture below to access video.  REF: BARRON’S

4C. Below is an updated snapshot of the current global state of economy according to TradingEconomics as of 12/16/2024.  REF: TradingEconomics

• The annual inflation rate in the US rose for a 2nd consecutive month to 2.7% in November 2024 from 2.6% in October, in line with expectations.
• The benchmark interest rate in Germany is set by the European Central Bank. Interest Rate in Germany averaged 1.86 percent from 1998 until 2024, reaching an all time high of 4.75 percent in October of 2000 and a record low of 0.00 percent in March of 2016.
• The gross domestic product in India expanded 1.1% quarter-on-quarter in the three months to September 2024, matching the same pace as in the previous period, remaining at its slowest economic growth since the second quarter of 2022, according to OECD.
• The annual inflation rate in India eased to 5.48% in November of 2024 from 6.21% in the previous month, loosely in line with market expectations of 5.5%, and remaining near the limit for the central bank’s limit of 2 percentage points away from 4%.

5. Quant & Technical Corner

Below is a selection of quantitative & technical data we monitor on a regular basis to help gauge the overall financial market conditions and the investment environment.

5A. Most recent read on the Fear & Greed Index with data as of 12/16/2024 – 6:59PM-ET is 57 (Greed).  Last week’s data was 48 (Neutral) (1-100).  CNNMoney’s Fear & Greed index looks at 7 indicators (Stock Price Momentum, Stock Price Strength, Stock Price Breadth, Put and Call Options, Junk Bond Demand, Market Volatility, and Safe Haven Demand).  Keep in mind this is a contrarian indicator!  REF: Fear&Greed via CNNMoney

5B. St. Louis Fed Financial Stress Index’s (STLFSI4) most recent read is at –0.5299 as of December 12, 2024.  A big spike up from previous readings reflecting the recent turmoil in the banking sector.  Previous week’s data was -0.6083.   This weekly index is not seasonally adjusted.  The STLFSI4 measures the degree of financial stress in the markets and is constructed from 18 weekly data series: seven interest rate series, six yield spreads and five other indicators. Each of these variables captures some aspect of financial stress. Accordingly, as the level of financial stress in the economy changes, the data series are likely to move together.  REF: St. Louis Fed

5C. University of Michigan, University of Michigan: Consumer Sentiment for September [UMCSENT] at 70.5, retrieved from FRED, Federal Reserve Bank of St. Louis, October 25, 2024.  Back in June 2022, Consumer Sentiment hit a low point going back to April 1980.  REF: UofM

5D. The Chicago Fed National Activity Index (CFNAI) decreased to –0.40 in October from –0.27 in September. Three of the four broad categories of indicators used to construct the index decreased from September, and all four categories made negative contributions in October. The index’s three-month moving average, CFNAI-MA3, decreased to –0.24 in October from –0.21 in September.  REF: ChicagoFed, October’s Report

5E. (11/21/2024) The Conference Board Leading Economic Index (LEI) for the US declined by 0.4% in October 2024 to 99.5 (2016=100), following a 0.3% decline in September (revised up from a 0.5% decline). Over the six-month period between April and October 2024, the LEI fell by 2.2%, slightly more than its 2.0% decline over the previous six-month period (October 2023 to April 2024). The composite economic indexes are the key elements in an analytic system designed to signal peaks and troughs in the business cycle. The indexes are constructed to summarize and reveal common turning points in the economy in a clearer and more convincing manner than any individual component. The CEI is highly correlated with real GDP. The LEI is a predictive variable that anticipates (or “leads”) turning points in the business cycle by around 7 months. Shaded areas denote recession periods or economic contractions. The dates above the shaded areas show the chronology of peaks and troughs in the business cycle. The ten components of The Conference Board Leading Economic Index® for the U.S. include: Average weekly hours in manufacturing; Average weekly initial claims for unemployment insurance; Manufacturers’ new orders for consumer goods and materials; ISM® Index of New Orders; Manufacturers’ new orders for nondefense capital goods excluding aircraft orders; Building permits for new private housing units; S&P 500® Index of Stock Prices; Leading Credit Index™; Interest rate spread (10-year Treasury bonds less federal funds rate); Average consumer expectations for business conditions.  REF: ConferenceBoard, LEI Report for October  (Released on 12/2/2024)

5F. Probability of U.S. falling into Recession within 3 to 4 months is currently at 67.2% (with data as of 12/16/2024 – Next Report 12/30/2024) according to RecessionAlert Research.  Last release’s data was at 68.53%.  This report is updated every two weeks. REF: RecessionAlertResearch

5G. Yield Curve as of 12/16/2024 is showing Normal – No Longer Inverted.  Spread on the 10-yr Treasury Yield (4.40%) minus yield on the 2-yr Treasury Yield (4.24%) is currently at +16 bps.  REF: Stockcharts   The yield curve—specifically, the spread between the interest rates on the ten-year Treasury note and the three-month Treasury bill—is a valuable forecasting tool. It is simple to use and significantly outperforms other financial and macroeconomic indicators in predicting recessions two to six quarters ahead.  REF: NYFED

5H. Recent Yields in 10-Year Government Bonds.  REF: Source is from Bloomberg.com, dated 12/16/2024, rates shown below are as of 12/16/2024, subject to change.

The 10-Year US Treasury Yield… REF: StockCharts1, StockCharts2

10-Year Real Interest Rate at 1.81261% as of 12/11/24.  REF: REAINTRATREARAT10Y

Federal government Interest Payments increased $20B+ to $1.1166 Trillion as of Q3-2024.   REF: FRED-A091RC1Q027SBEA

Interest payments as a percentage of GDP increased from 1.84853 in 2022 to 2.37794 as of 10/18/24.   REF: FRED-FYOIGDA188S

5I. (12/16/2024) Today’s National Average 30-Year Fixed Mortgage Rate is 6.93% (All Time High was 8.03% on 10/19/23).   Last week’s data was 6.72%.  This rate is the average 30-year fixed mortgage rates from several different surveys including Mortgage News Daily (daily index), Freddie Mac (weekly survey), Mortgage Bankers Association (weekly survey) and FHFA (monthly survey).  REF: MortgageNewsDaily, Today’s Average Rate

The recent spike in the 30-year fixed-rate jumbo mortgage to 6.91%, compared to Freddie Mac’s rate at 6.81% and the Mortgage Bankers Association (MBA) rate at 6.73%, highlights key differences in the mortgage market. Jumbo mortgages, which exceed the conforming loan limits set by government agencies like Freddie Mac, typically carry higher interest rates because they are riskier for lenders. These loans are not backed by government entities, which increases the risk for lenders and, consequently, leads to higher rates. In contrast, Freddie Mac and MBA provide averages for conforming loans, which meet federal guidelines and have lower risk due to government backing, keeping their rates lower.

(12/16/24) Housing Affordability Index for Oct = 102.3 // Sep = 105.5 // Aug = 98.6 // July = 95 // June = 93.3 // May = 93.1 // April = 95.9 // March = 101.1 // February = 103.0. Data provided by Yardeni Research.  REF: Yardeni

5J. Velocity of M2 Money Stock (M2V) with current read at 1.389 as of (Q2-2024 updated 10/30/2024).   Previous quarter’s data was 1.385.  The velocity of money is the frequency at which one unit of currency is used to purchase domestically- produced goods and services within a given time period. In other words, it is the number of times one dollar is spent to buy goods and services per unit of time. If the velocity of money is increasing, then more transactions are occurring between individuals in an economy.  Current Money Stock (M2) report can be viewed in the reference link.   REF: St.LouisFed-M2V

M2 consists of M1 plus (1) small-denomination time deposits (time deposits in amounts of less than $100,000) less IRA and Keogh balances at depository institutions; and (2) balances in retail MMFs less IRA and Keogh balances at MMFs. Seasonally adjusted M2 is constructed by summing savings deposits (before May 2020), small-denomination time deposits, and retail MMFs, each seasonally adjusted separately, and adding this result to seasonally adjusted M1. Board of Governors of the Federal Reserve System (US), M2 [M2SL], retrieved from FRED, Federal Reserve Bank of St. Louis; Updated on November 26, 2024.  REF: St.LouisFed-M2

Money Supply M0 in the United States decreased to 5,567,200 USD Million in October from 5,588,400 USD Million in September of 2024. Money Supply M0 in the United States averaged 1,155,032.53 USD Million from 1959 until 2024, reaching an all-time high of 6,413,100 USD Million in December of 2021 and a record low of 48,400 USD Million in February of 1961.   REF: TradingEconomics, M0

5K. In November, the Consumer Price Index for All Urban Consumers rose 0.3 percent, seasonally adjusted, and rose 2.7 percent over the last 12 months, not seasonally adjusted. The index for all items less food and energy increased 0.3 percent in November (SA); up 3.3 percent over the year (NSA). December 2024 CPI data are scheduled to be released on January 15, 2024, at 8:30AM-ET.  REF: BLS, BLS.GOV

 5L. Technical Analysis of the S&P500 Index.  Click onto reference links below for images.

• Short-term Chart: Bullish on 12/16/2024 – REF: Short-term S&P500 Chart by Marc Slavin (Click Here to Access Chart)

• Medium-term Chart: Bullish on 12/16/2024 – REF: Medium-term S&P500 Chart by Marc Slavin (Click Here to Access Chart)

• Market Timing Indicators – S&P500 Index as of 12/16/2024 – REF: S&P500 Charts (7 of them) by Joanne Klein’s Top 7 (Click Here to Access Updated Charts)

• A well-defined uptrend channel shown in green with S&P500 still on up trend.  REF: Stockcharts

• S&P500 and CBOE Volatility Index (VIX) as of 12/16/2024.  REF: FRED, Today’s Print

5M. Most recent read on the Crypto Fear & Greed Index with data as of 12/17/2024au is 87 (Extreme Greed).  Last week’s data was 78 (Extreme Greed) (1-100).  Fear & Greed Index – A Contrarian Data.  The crypto market behavior is very emotional. People tend to get greedy when the market is rising which results in FOMO (Fear of missing out). Also, people often sell their coins in irrational reaction of seeing red numbers. With the Crypto Fear and Greed Index, the data try to help save investors from their own emotional overreactions. There are two simple assumptions:

• Extreme fear can be a sign that investors are too worried. That could be a buying opportunity.
• When Investors are getting too greedy, that means the market is due for a correction.

Therefore, the program for this index analyzes the current sentiment of the Bitcoin market and crunch the numbers into a simple meter from 0 to 100. Zero means “Extreme Fear”, while 100 means “Extreme Greed”.  REF: Alternative.me, Today’sReading

Bitcoin – 10-Year & 2-Year Charts. REF: Stockcharts10Y, Stockcharts2Y