NVDA
NVIDIA
-- 144.470 TSLA
Tesla
-- 410.440 PLTR
Palantir
-- 79.890 CRNC
Cerence
-- 19.330 MSTR
MicroStrategy
-- 339.660 
Weekly Insights 30th Dec 2024
Alas, our last Friday also means our last weekly report of 2024. Today we will try to summarize and conceptualize market action for 2024 as we move forward to the new year. Wishing you a lovely holiday ahead with your loved ones, and best wishes for a very prosperous 2025 ahead with good health, happiness and success. Major indices managed to close higher with S&P and Nasdaq breaking higher while small caps Russell lagged. Bitcoin slumped 4% and treasury yields cooled off after hitting multi month highs last week.
Market breadth was slightly positive with advancers leading decliners by a 1:4:1 margin. While the famed “Santa Rally” wasn’t delivering its full force, optimism for the week ahead remains high.
Six of the 11 stock sectors closed higher last week with growth stocks outperforming, as would be expected in an up-market. Safety sectors like Utilities and Staples underperformed along with those tied to economic growth like Materials and Industrials. Besides just the normal selling out of safer stocks to position in growth, headwinds from higher rates in bonds makes dividend paying stocks less attractive relatively.
Wrapping up the year, we saw big outperformances in a few sectors and what could be value opportunities in others:
According to Novel investor website, Overall, the S&P 500 has run 25% over the past year, well above its 14% average over the 2009 to 2023 period. It’s the first time the index has increased more than 20% in two consecutive years since 1997. The biggest outperformances were seen in Utilities, up 20% versus a 9.3% average, Communication Services (35% vs 9.4%), and Financials (29% vs 11.3%). Strength in Financials occurred later in the year on lower rates and hopes for deregulation and is likely to carry into the next year. Biggest underperformances were seen in Energy, up just 0.9% versus a 6.7% average, Healthcare (1.9% vs 13.6%), Materials (-0.7% vs 11.9%), and Real Estate (1.2% vs 11.8%).
Momentum and growth were the top factors in 2024 while value factor underperformed. This is consistent as the US economy is still relatively strong and resilient as fed’s cutting cycle is still intact in 2024, a total of 100bps of cuts was done.
Bond markets continued to bear steepened. Since the start of the year, money market yields dropped 100bps while capital market yields rose on average 70bps. So, what gives? Some investors offer different explanations. Some argue that higher yields are driven from higher GDP growth expectations, other cite worries of inflation and fiscal unsustainability under upcoming trump administration while lastly, another explanation is that foreign central banks are selling out their US treasury holdings to defend their currency. 2y10y and 3m10y spread stands at 31bps.
On a Year to date basis, bond yield composition is mainly driven by higher real rates Not higher breakeven (inflation expectations) as it remains anchored around the 2% mark. Next, notice that the 3 month money market yield and the 2 year capital market yield is exactly the same at 4.31%. Given that the forward rate based on SOFR is downward sloping, this means that term premium within the 2 year is building up.
I do expect continued headwinds in the bond market until trump takes over on Jan 21st. There has been a lot of frontrunning, and I expect some to be overblown. The main catalyst is for the dollar to overshoot and move lower then bonds may likely find a bottom. As of December 19, 2024, the US prime loan rate is 7.50%. This is higher than the long-term average of 6.84%.
In terms of economic data amidst a holiday shortened week, we saw durable goods declined for the 4th time in the last 6 months. The Conference Board reported that its index of US consumer confidence fell in December to 104.7 from 112.8 in November. Initial jobless claims came in higher than expected at 219K vs 223K consensus but lower than last month’s 220k print. Continuing jobless claims rose to 1.91m, its highest since late 2021.
We are back marginally at an implied volatility discount space after the VIX spike over last few weeks. We are likely to see more profit taking opportunities as we usher towards January window. Putting on hedges when volatility discounts exist is a good strategy here as equities valuation and positioning are overextended still. Valuation metrics like P/E and P/S are sitting near 95% percentile range and have breached +1 standard deviation over a 1 year period.
Credit spreads is pricing in consistent with equity markets valuation. On an aggregate basis, both the investment grade and high yield spreads are trading at its tightest spread in 4 decades. CCC rated with the highest default risk among corporates gained a whooping 17% total return this year. Hence buying CDX becomes increasingly attractive and cheap.
There will likely be opportunities to buy the dip as growth continues to normalize in 2025. As long as real GDP growth remains positive, and Fed begins narrowing the spread between Fed funds and core CPI.
With another week of no earnings or big news, investors are anxiously waiting for fourth-quarter earnings to save them from a profit-taking slump. Strong returns over the last two years, interest rates near two-decade highs and undeniably expensive stocks with a policy uncertainty overhang would normally push for a correction. It’s the direction we’ve seen since the Fed spooked the market on the 18th with the S&P 500 down and volatility spiking.
Earnings for the final three months of the year are the only thing that can save investors now and they couldn’t come soon enough. Fourth quarter results will start trickling out next week but don’t really get started until the big banks report on the 15th. Analysts are expecting earnings to have increased 11.9% from the year prior, the highest rate since Q4 2021 for stocks in the S&P 500.
According to T Rowe price, Stocks in Europe were higher over the abbreviated holiday trading week, with the STOXX 600 Index gaining 0.99% in local currency terms. France’s CAC 40 Index gained 1.11%, while Germany’s DAX rose 0.50%.
Japan’s stock markets followed with the Nikkei 225 Index gaining 4.08% and the broader TOPIX Index up 3.69%, according to FactSet. The weakness of the yen supported the profit outlooks for Japan’s export-heavy industries, which remained near five-month lows amid a cautious tone from the Bank of Japan (BoJ). The yen weakened to around JPY 157 against the dollar, from about JPY 156 at the end of the prior week. The yield on the 10-year Japanese government bond increased to 1.1%, the highest level in five weeks.
Chinese stocks rose amid hopes that the government will announce further stimulus measures to support growth. The Shanghai Composite Index added 0.95%, while the blue chip CSI 300 gained 1.36%. Chinese officials plan to sell a record RMB 3 trillion in special Treasury bonds next year as Beijing ramps up efforts to bolster the economy, Reuters reported. The reported bond issue is a sharp increase from the RMB 1 trillion sovereign debt issuance in 2024, and proceeds will be used for boosting consumption via subsidy programs, equipment upgrades, and investment in innovation-driven sectors as China braces for a potential second trade war with the US.
Political turmoil appeared to continue to weigh on investor sentiment in South Korea, which was poised to record its ninth monthly loss in 2024, more than the eight monthly losses recorded during the 1997 Asian financial crisis, according to The Korea Times. On Friday, the country’s parliament voted to unseat acting President Han Duck-soo—a move that came only two weeks after the impeachment of President Yoon Suk Yeol, following his failed attempt to impose martial law. South Korean won is one of the top underperformers this year with 12% decline YTD.
That’s all for this week, See you again next year.
Prepared by: Samuel Koh, CFA
Disclaimer: This presentation is for informational and educational use only and is not a recommendation or endorsement of any particular investment or investment strategy. Investment information provided in this content is general in nature, strictly for illustrative purposes, and may not be appropriate for all investors. It is provided without respect to individual investors’ financial sophistication, financial situation, investment objectives, investing time horizon, or risk tolerance. You should consider the appropriateness of this information having regard to your relevant personal circumstances before making any investment decisions. Past investment performance does not indicate or guarantee future success. Returns will vary, and all investments carry risks, including loss of principal.
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