What Happened Last Week
- Santa Rally Fizzles: The S&P 500 closed the week ~2% below its levels before the Fed’s rate cut in mid-December.
- Holiday Market Conditions: Noisy, thinly traded markets saw weakness in small-caps and cyclicals and relative strength in domestic mega-caps.
- Political Risks: Last week’s speaker vote was just one example of the uncertainties investors will contend with in 2025.
What We’re Watching This Week
- Jobs: Friday’s nonfarm payroll is the main event; Tuesday’s job openings data will add to the labor market picture.
- NVDA Keynote: The CEO of one of the most impactful AI stocks, Jensen Huang, speaks Monday night at the Consumer Electronics Show.
- Price Action: Investors to deploy capital with a fresh start in the first real week of the year.
Investment Management Team’s Views
Santa didn’t arrive for equity investors in late December – the S&P 500 slipped last week to close about 2% below its mid-December levels. The lack of a “Santa Rally” is inconsequential for 2025, in our view: earnings growth, a strong labor market, and a Fed with space to ease policy are far more critical for risk assets in 2025. Over the last month, the price action saw the post-election gains in Trump trade beneficiaries (small-caps and cyclicals) unwound in incredibly narrow and choppy trading in favor of 2024’s winners. Despite the recent sell-off in cyclicals, there are few signs that risk appetite is still robust after back-to-back 25+% gains for the S&P 500 (a feat last seen in ‘97/’98); we view the setup for the recently beat-up parts of the U.S. market as favorable to kick off 2025.
Politics and the lagged impact of higher rates stand out as two (potentially intertwined) 2025 wild cards. Last week’s narrow but successful speaker vote highlights DC’s challenges following federal government funding disputes that underscored Republican divisions. While potential policy shifts remain positive for markets, we believe concerns about federal debt are keeping long-term rates higher than expected, amplifying economic risks. Although a slowdown hasn’t yet materialized (and we think it unlikely in the near term), we’re monitoring the labor market and small-cap performance as key indicators for the economic outlook in 2025.
The first full week of 2025 brings a fresh start for investors. Friday’s nonfarm payrolls (NFP) report is the main focus, with potential noise from hurricanes and strikes, while Tuesday’s JOLTs data will provide additional labor market insight. Investors will watch Monday night’s keynote from NVIDIA CEO at the Consumer Electronics Show. With markets closed on Thursday to honor former President Jimmy Carter, investors are eager to kick off 2025 with fresh trades, hoping for clearer price signals following the past two weeks’ noisy, low liquidity and low volume trading.
