Resilient Consumer Keeps Santa Rally Alive

Most equity indexes concluded the previous week with marginal gains or remained largely flat. Small-cap stocks within the Russell 2000 index outperformed their large-cap counterparts, as represented by the S&P 500, signaling a resurgence after a year of relative underperformance. Within the S&P 500, growth stocks continued to outperform value stocks, while the energy sector lagged as oil prices dropped to their lowest point since June. Concurrently, the bond market continued its rally as investors increasingly bet on a higher likelihood of rate cuts in the upcoming year.

Surprising Upturn in November Job Report

The November nonfarm payrolls report surprised on the upside, with 199,000 jobs added last month, surpassing the consensus expectations of approximately 180,000 jobs. Following October’s two-year high of 3.9%, the unemployment rate regressed to 3.7% in November. Annual wage growth met expectation at 4%. The strong job market once again showed the American economy’s resilience, after the fastest rate hike program in history.

Consumer Sentiment Boosts

The University of Michigan’s widely tracked consumer sentiment index demonstrated unexpected resilience. The index increased by 13% in December, erasing all declines from the previous four months. All five components of the survey improved. Most notably, expectations for inflation in 2024 declined from 4.5% to 3.1%, marking the lowest level recorded since March 2021. Additionally, expectations for the five-year inflation outlook dropped to 2.8%, matching the second lowest reading since March 2021. The measures gauging current economic conditions rose from 68.3 to 74, while the measure gauging consumer expectations surged from 56.8 to 66.4. Although overall sentiment is now 39% above the all-time low measured in June of 2022, it is still well below pre-pandemic levels.

Semiconductor Sector Leads Market Gains

The semiconductor sector led the gains last week. Enthusiasm over generative artificial intelligence (AI) continued to propel the technology sector forward. Alphabet rose 5% last Thursday after revealing Gemini, its new large-language AI model capable of processing text, code, audio, images, and video. Once integrated into mobile phones, Gemini has the potential to generate low to mid-single digit growth for Alphabet’s Cloud segment, translating to approximately $1 billion in additional revenue.

Additionally, Advanced Micro Devices (AMD) surged nearly 10% following its announcement of a new generation of AI chips. AMD also estimated a $45 billion addressable market for its AI processors for the current year, up from its June estimate of $30 billion. Analysts estimate that Nvidia Corporation (NVDA) currently holds about 80% share of the AI chip market, with the chip giant’s latest quarterly revenue tripling and net income rising by nearly 50%.

Upcoming Week

Looking ahead, key macroeconomic reports to watch this week include the CPI report on Tuesday and retail sales on Thursday. However, the most eagerly anticipated event will be the Federal Reserve’s final meeting of the year on Wednesday. While Fed fund futures are currently pricing in only a 1% chance of a rate hike this week, the market has factored in more aggressive rate cuts for the coming year. Nevertheless, market sentiment will be significantly influenced by policymakers’ tone and their expectations for future monetary policy.

The information contained in this article is for information purposes only, and represent the views of the author. It is not intended as specific investment or financial advice, or a recommendation or solicitation to buy or sell any security. Any investments or strategies listed in this article may not be suitable for all investors. Past performance is not indicative of future performance, and as with any investment, prices may fluctuate. It is recommended that advice is sought from a qualified investment professional prior to implementing any financial plan. LOM has made every effort to ensure that the contents herein have been compiled from sources believed reliable, however LOM does not warrant the accuracy, adequacy, timeliness, or completeness of this information expressly disclaims liability for errors or omissions in this information.