Market update

U.S. equities pared some of their gains this week. 

The S&P 500 (-0.6%) fell slightly despite stellar performance from its largest cohort (Magnificent 7 +3.1%).

Alphabet (+9.9%) posted a strong week after its breakthrough in quantum computing and an expansion of its Waymo ride sharing business in Miami. Restructuring news bolstered Warner Bros. (+17.2%) to be the best performing stock in the index.

In fixed income, rates across the curve were higher and the curve steepened. The 2-year (4.19%) rose nine basis points and the 10-year (4.33%) was higher by 17 basis points. Treasuries sold off in response to slightly elevated initial jobless claims and a firmer headline producer price (though the core measure came in line with Street expectations). 

In commodities, gold (+1.8%) and oil (+3.2%) both moved higher amid rising geopolitical risks in the Middle East.

As we approach the end of the year, we reflect on the many questions answered in 2024: Would the economy navigate a soft landing? Who would win the U.S. presidential election? Would the S&P 500 reach a new all-time high? In today’s note, we shift gears and examine those questions that remain unanswered across Chinese growth, the global easing cycle and tariffs.

2024’s unanswered questions

Will China’s stimulus translate to better growth? Throughout 2024, the Chinese government has done what it could to support growth, but it hasn’t really stimulated the economy. The measures were focused on increasing credit, which was already abundant. Rather, the market was looking for policies that could increase demand.

Starting in September, Chinese officials started to shift more towards what the market wanted – stimulus focused on increasing consumption. Forward guidance for 2025 indicates room for fiscal and budget deficit expansion. Government officials have also left the door open to further stimulus if U.S. tariffs increase. For now, the proposals are still conjecture, and the market is looking for something more concrete. Instead, what was delivered was a 14.3 trillion renminbi (RMB) restructuring of government debt. Despite lacking more substance, the market is taking the forward guidance in stride. Since September, Chinese onshore equities have nearly tripled the performance of U.S. large cap stocks. It seems that markets are getting comfortable with the government assigning a quasi-floor beneath growth. 

But there is still reason to be cautious, as a floor is different than stimulating growth. For example, over the same period, 10-year Chinese government bond yields (which climb amongst increasing growth estimates) are at their lowest level on record. Furthermore, the Yuan has depreciated nearly 3.5% relative to the U.S. dollar since September. 

All of this is to say, the market seems to be grappling with how these factors will shake out and the extent and sector focus of stimulus that is yet to come. We remain cautious on the market until more clarity around growth targets come in March 2025.

Are we past peak easing? In our 2024 Outlook, we predicted a year of global monetary easing. That turned out to be the correct call. During 2024, 27 of the 37 central banks, including all major developed markets except Japan, lowered interest rates in unison. 

Easing policy and solid economic activity (especially in the U.S.) helped drive global equities higher +23% and U.S. equities (S&P 500 +29%) to 57 new all-time highs. However, with the soft landing confirmed, could we already be past the peak of central bank rate cuts?

We’ve already seen some global central banks raise rates. As we wrote in the 2025 Outlook, Brazil, who was one of the first central banks to start the cutting cycle in 2023, has reversed course and started a new tightening cycle. Just this week, Brazil raised policy rates by 100 basis points – its biggest hike since May 2022. Other emerging market central banks (e.g. Mexico and Ukraine) may be on a similar path toward anchoring inflation expectations and long-term rates in the backdrop of mounting fiscal deficits.

Could the U.S. be next? We don’t think so. The Federal Reserve has told us they are on a path to a more neutral policy stance. That means lower policy rates. The question, though, is at what level is policy neutral? For now, it’s likely that the Federal Reserve funds rate is still above the top end of the ranges of most estimates. We expect the Federal Reserve to keep gradually lowering rates (including a 25-basis point cut at their December meeting) until they get closer to a 3% to 4% range.

Tariff talk, what’s to come? President-elect Donald Trump has campaigned on increasing tariffs against U.S. trading partners. The U.S. already has export controls on semiconductors, blacklisted Chinese companies and placed restrictions on artificial intelligence and supercomputing. Furthermore, Trump has proposed a 60% tariff on all Chinese goods and up to 10% on all other imports.

China has responded by banning the export of several materials (of which it is the dominant producer) to the U.S. The economic impact of the ban to the U.S. is relatively narrow, but the overall impact grows when you consider the commodities importance as an input in several key products such as semiconductors, satellites and night vision goggles.

The move does point toward a further escalation of already tense trade relations. The U.S. is reliant upon imports across a number of industries for the future, including critical minerals. But it’s not just China, as Trump also threatened to impose 25% tariffs on goods from Mexico (the United States’ largest trading partner) and Canada. The potential for increased trade restrictions under a new Trump administration has renewed trade policy uncertainty and raises the risk of further retaliation across these industries.

What does this mean for the U.S.? Tariffs are likely to lead to higher inflation without corresponding economic growth. The New York Federal Reserve studied the effects of the US-China trade war during 2018-2019 and found that it increased the Consumer Price Index (CPI) by 0.3, which was a one-time rise. All else equal, that puts upward pressure on the Federal Reserve funds rate and with higher interest rates, we would expect dollar strength to persist. However, tariffs alone are likely not enough to derail our overall constructive view.

Bonus: Will the Santa Claus rally visit markets in 2024? Historically, the last month of the year is a good one for the S&P 500. Consumers spend more on retail during the holiday season, the “Santa Claus” rally (where stocks tend to rise towards the end of the year) and general optimism moving into the new year tend to benefit the calendar period.

Since 1928, the S&P 500 has averaged a 0.7% monthly return. December tends to be a more favorable month for equities, averaging nearly double at 1.3%. Moreover, elections don’t seem to hinder December returns. In fact, they are higher in election years, on average (1.6%).

Will December be as favorable in 2024? We won’t have to wait much longer for the answer. And as always, for any other questions, reach out to your J.P. Morgan advisor.

All market and economic data as of 12/13/2024 are sourced from Bloomberg Finance L.P. and FactSet unless otherwise stated.

DISCLOSURES

The information presented is not intended to be making value judgments on the preferred outcome of any government decision or political election.

Private investments are subject to special risks. Individuals must meet specific suitability standards before investing. This information does not constitute an offer to sell or a solicitation of an offer to buy. As a reminder, hedge funds (or funds of hedge funds), private equity funds, real estate funds often engage in leveraging and other speculative investment practices that may increase the risk of investment loss. These investments can be highly illiquid, and are not required to provide periodic pricing or valuation information to investors

Investing in fixed income products is subject to certain risks, including interest rate, credit, inflation, call, prepayment, and reinvestment risk.

The price of equity securities may rise or fall due to the changes in the broad market or changes in a company's financial condition, sometimes rapidly or unpredictably. Equity securities are subject to "stock market risk" meaning that stock prices in general may decline over short or extended periods of time.

International investments may not be suitable for all investors. International investing involves a greater degree of risk and increased volatility. Changes in currency exchange rates and differences in accounting and taxation policies outside the U.S. can raise or lower returns. Some overseas markets may not be as politically and economically stable as the United States and other nations. Investments in international markets can be more volatile.

Private Equity is typically composed of Venture Capital, Leveraged Buyouts, Distressed Investments and Mezzanine Financing, which are all generally considered to be high risk, illiquid investments designed to deliver larger expected returns than publicly traded securities as compensation for their greater risk. As a result, investing in Private Equity is not suitable for all investors.​

Index definitions:

The Russell 3000 Index is a capitalization-weighted stock market index that seeks to be a benchmark of the entire U.S. stock market. It measures the performance of the largest 3,000 U.S. companies representing approximately 96% of the investable U.S. equity market.

The S&P 500 Equal Weight Index is the equal-weight version of the widely-used S&P 500. The index includes the same constituents as the capitalization weighted S&P 500, but each company in the S&P 500 EWI is allocated a fixed weight of the index total at each quarterly rebalance.

The Bloomberg U.S. Aggregate Bond Index is a broad-based flagship benchmark that measures the investment grade, US dollar-denominated, fixed-rate taxable bond market. The index includes Treasuries, government-related and corporate securities, MBS (agency fixed-rate pass-throughs), ABS and CMBS (agency and non-agency).

The Magnificent Seven stocks are a group of influential companies in the U.S. stock market: Alphabet, Amazon, Apple, Meta Platforms, Microsoft, NVIDIA, and Tesla.

The Magnificent 7 Index is an equal-dollar weighted equity benchmark consisting of a fixed basket of 7 widely-traded companies (Microsoft, Apple, Nvidia, Alphabet, Amazon, Meta, Tesla) classified in the United States and representing the Communications, Consumer Discretionary and Technology sectors as defined by Bloomberg Industry Classification System (BICS).

The S&P Midcap 400 Index is a capitalization-weighted index which measures the performance of the mid-range sector of the U.S. stock market.

The S&P 500 index is widely regarded as the best single gauge of large-cap U.S. equities and serves as the foundation for a wide range of investment products. The index includes 500 leading companies and captures approximately 80% coverage of available market capitalization.

Bonds are subject to interest rate risk, credit, call, liquidity and default risk of the issuer. Bond prices generally fall when interest rates rise.

Standard and Poor’s 500 Index is a capitalization-weighted index of 500 stocks. The index is designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. The index was developed with a base level of 10 for the 1941–43 base period.

The Bloomberg Eco Surprise Index shows the degree to which economic analysts under- or over-estimate the trends in the business cycle. The surprise element is defined as the percentage difference between analyst forecasts and the published value of economic data releases. 

The MSCI World Index is a free float-adjusted market capitalization index that is designed to measure global developed market equity performance.

The NASDAQ 100 Index is a basket of the 100 largest, most actively traded U.S companies listed on the NASDAQ stock exchange. The index includes companies from various industries except for the financial industry, like commercial and investment banks. These non-financial sectors include retail, biotechnology, industrial, technology, health care, and others.

The Russell 2000 Index measures small company stock market performance. The index does not include fees or expenses.

We believe the information contained in this material to be reliable but do not warrant its accuracy or completeness. Opinions, estimates, and investment strategies and views expressed in this document constitute our judgment based on current market conditions and are subject to change without notice.

The views, opinions, estimates and strategies expressed herein constitutes the author's judgment based on current market conditions and are subject to change without notice, and may differ from those expressed by other areas of J.P. Morgan. This information in no way constitutes J.P. Morgan Research and should not be treated as such. You should carefully consider your needs and objectives before making any decisions. For additional guidance on how this information should be applied to your situation, you should consult your advisor.

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RISK CONSIDERATIONS

• Past performance is not indicative of future results. You may not invest directly in an index.
• The price of equity securities may rise or fall due to the changes in the broad market or changes in a company's financial condition, sometimes rapidly or unpredictably. Equity securities are subject to 'stock market risk' meaning that stock prices in general may decline over short or extended periods of time.
• Investing in fixed income products is subject to certain risks, including interest rate, credit, inflation, call, prepayment and reinvestment risk. Any fixed income security sold or redeemed prior to maturity may be subject to substantial gain or loss.
• In general, the bond market is volatile and bond prices rise when interest rates fall and vice versa. Longer term securities are more prone to price fluctuation than shorter term securities. Any fixed income security sold or redeemed prior to maturity may be subject to substantial gain or loss. Dependable income is subject to the credit risk of the issuer of the bond. If an issuer defaults no future income payments will be made.
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• International investments may not be suitable for all investors. International investing involves a greater degree of risk and increased volatility. Changes in currency exchange rates and differences in accounting and taxation policies outside the U.S. can raise or lower returns. Some overseas markets may not be as politically and economically stable as the united states and other nations. Investments in international markets can be more volatile.
• Investments in emerging markets may not be suitable for all investors. Emerging markets involve a greater degree of risk and increased volatility. Changes in currency exchange rates and differences in accounting and taxation policies outside the U.S. can raise or lower returns. Some overseas markets may not be as politically and economically stable as the united states and other nations. Investments in emerging markets can be more volatile.
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• As a reminder, hedge funds (or funds of hedge funds) often engage in leveraging and other speculative investment practices that may increase the risk of investment loss. These investments can be highly illiquid, and are not required to provide periodic pricing or valuation information to investors, and may involve complex tax structures and delays in distributing important tax information. These investments are not subject to the same regulatory requirements as mutual funds; and often charge high fees. Further, any number of conflicts of interest may exist in the context of the management and/or operation of any such fund. For complete information, please refer to the applicable offering memorandum.
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