In its August 2024 country report, the International Monetary Fund indicated that in 2023, China’s central and local governments and other government-related funds and entities, owed as much as 116.9% of GDP in debt. Moreover, the IMF estimated that China’s debt burden would grow to nearly 150% of GDP by the end of the decade. This IMF forecast was ominous; however, it was made well before this week’s announcement by Chinese leaders. This week China declared that the government is ready to deploy whatever stimulus is needed to counter the impact of US trade tariffs on next year’s economic growth. The timing of this declaration is notable since next year’s growth, budget deficit and other targets will be discussed in coming days at an annual meeting of Communist Party leaders, known as the Central Economic Work Conference (CEWC). China is currently forecasting GDP growth of 5% for 2025 and this week’s message shows China is willing to go even deeper into debt and will prioritize growth over financial risks, at least in the near term. It also shows the angst government officials feel regarding their economy and the pressure that China has regarding the prospect of US tariffs.

We are highlighting these statements from China because too many economists are focused on the “inflationary impact” of President-elect Trump’s potential tariff policy while neglecting to acknowledge either what happened in Trump’s first term or how tariffs may simply change the behavior of domestic and foreign corporations and countries. If one assesses tariffs in an “all things being equal” world a tariff will certainly be a tax, but that is not the way the world works. It will lead you to an inaccurate outcome. In the case of China, this appears to be an excellent time for the US to bring them to the negotiating table.

In a different area of the world, it is interesting to reflect on how the threat of tariffs on Mexico has already changed behavior at the Mexican border. On November 26, 2024 according to Newsweek, Mexican President Claudia Sheinbaum asserted that migrant caravans are no longer reaching the US-Mexico border. And at the end of November 2024, US Customs and Border Protection (CBP) reported a significant decrease in migrant encounters at the US-Mexico border compared to the previous year (and months).

It is stunning to see how many things have changed in the past month. Although Donald J. Trump will not be in the Oval Office for several more weeks, we are already seeing a marked difference in sentiment readings and consumer behavior. Recent financial headlines are revealing: “Goldman Sachs CEO David Solomon says dealmaking could surpass 10-year averages in 2025,” “Warburg Pincus sees an uptick in private equity deals in 2025,” “BlackRock sees investors shifting from cash to stocks and bonds.” And to a large extent, this sentiment supports what has been happening to stock prices in recent  weeks. One could call it “the Donald effect.”

Valuation is not supportive of equities, but momentum, hope, and sentiment are now overruling valuation. The SPX trailing 4-quarter operating multiple is 25.8 times, and well above all long- and short-term averages. The 12-month forward PE multiple is 22.1 times and when added to inflation of 2.6%, sums to 24.7, which is above the top of the normal range of 14.8 to 23.8. By all measures, the equity market remains richly valued. But we believe valuation may be next year’s problem. See page 8.

In a definitive response to the presidential election, November’s National Federation of Independent Business (NFIB) small business optimism index jumped 8 points to 101.7 from 93.7, its highest level since June 2021. The NFIB outlook for general business conditions index went from negative 5 to 36 and rose to its highest level since June 2020. All categories improved in November and plans for capital expenditures, additional employment, business expansion, and an increase in inventories improved in the month. See page 5. The importance of small business owners to the US economy should not be underestimated. According to the Office of Advocacy (housed within the US Small Business Administration), the US contains 34.8 million small businesses, which account for 45.9% of total employment.

Both the Conference Board and University of Michigan consumer sentiment indices had positive upticks in confidence in November. The preliminary survey for December’s University of Michigan sentiment revealed another 2.2-point increase from 71.8 to 74.0. However, all of that increase came from the present conditions segment of the survey which jumped a stunning 13.8 points to 77.7. The expectations index, which had been the source of strength in this survey, fell 5.3 points to 71.6, its lowest level since July. Nonetheless, consumer sentiment is much improved. See page 4.

Consumer credit expanded by $19.2 billion in October, a big increase from the $3.2 billion seen in September. Most of the increase came from revolving credit which rose by $15.7 billion. This expansion in credit is a positive omen for the broader economy since contractions in consumer credit tend to be associated with recessions. We have been closely monitoring consumer credit after total credit grew by a mere 1.5% YOY in June and nonrevolving credit contracted 0.2% YOY in the same month. October’s expansion in credit is a favorable event and is another sign of a lift in consumer spirit. See page 6.

The November jobs report showed an increase of 227,000 new jobs in the month, of which 194,000 were in the private sector and most were in the services sector. There was also a positive revision of 24,000 jobs for October and a positive 32,000 for the month of September which equates to a total increase of 283,000 jobs in the report. However, the report was not all good news since the unemployment rate increased from 4.1% to 4.2%. This ratio comes from the household survey, which is much broader than the establishment survey, and it told a different story. It indicated there was a decrease of 355,000 jobs in the month and an increase of 161,000 people unemployed. Therefore, the civilian labor force (the total of employed and unemployed) declined by 194,000, to just under 168.3 million. The participation rate also fell 0.1 to 62.5 and the employment-population ratio fell 0.2 to 59.8, its lowest level since early 2022. See page 7.

Our favorite indicator of economic strength or weakness is the year-over-year change in the number of people employed. According to the establishment survey, job growth was 1.45% YOY in November, below the long-term average of 1.69%, but still healthy. However, the household survey shows the number of people employed declined 0.45% YOY in November, contracting for the second time in four consecutive months. The long-term average growth rate for this series is 1.5% YOY. See page 7. Our concern is that once the BLS finalizes its annual revisions to payroll data for January 2025 (reported in early February), it will fall in line with the household survey and show that the job market has been slowly contracting for most of 2024. But again, that may be a problem for next year. At present all our technical indicators continue to be supportive of the market. The 25-day up/down volume oscillator is 1.39, neutral, and relatively unchanged from last week. The good news is that this indicator is not yet overbought, which would be indicative of a stretched or vulnerable marketplace. However, since this indicator measures the level of volume supporting an advance, we would be concerned if the oscillator does not reach overbought territory in coming days or weeks to confirm the new highs. See page 11. All in all, seasonality and liquidity suggest stock prices could move higher through the end of the year.

Gail Dudack

Click to Download

Against a backdrop that included a sudden burst of political chaos in South Korea, Israel threatening to expand the war if the Hezbollah truce collapses, and China issuing a ban on exports of critical minerals to the US, the S&P 500 and Nasdaq Composite indices were unfazed and made new all-time highs this week. Offsetting some of this geopolitical news was the US Labor Department’s announcement that job openings increased by 372,000 in October to 7.74 million jobs. Layoffs declined by 169,000, the most in 18 months, indicating a stable employment environment. However, hires fell by 269,000 to 5.313 million, dragged lower by declines in construction, manufacturing, finance and insurance, professional and business services, and the leisure and hospitality industry. The hires rate dropped to 3.3% from 3.5% in September, but the Labor Department also indicated that there are 1.11 job openings for every unemployed person in October. This was up from 1.08 reported in October, but below the 1.2 ratio seen prior to the pandemic and below the 2.03 peak seen in early 2002. Overall, this report suggested the labor market is well anchored.

Solid Economic News

The revision to third quarter GDP revealed few changes and showed the economy increased at a 2.8% (SAAR) pace, down slightly from the 3% rate seen in the second quarter of the year. However, both of these quarters suggested the economy was growing just below the long-term average of 3.2% and was thereby expanding at a healthy pace.

Yet despite this hearty growth in the economy, at the end of the third quarter, total US market capitalization rose to 2.13 times nominal GDP. This ratio is not far from the record 2.2 recorded in June of 2020 (in the midst of the pandemic) and well above the previous record of 1.83 made at the March 2000 bubble peak. See page 3. More importantly, the stock market has been booming since the presidential election, and if we were to use today’s market capitalization and compare it to September’s GDP, it would set a new record at 2.25. In short, various forms of market valuation indicate the current stock market is very richly valued. Nonetheless, the exuberance surrounding the re-election of Donald J. Trump is overruling a host of geopolitical and fundamental issues and that is likely to continue through the end of the year.

Meanwhile, a number of data releases imply the economy is on solid footing in the final quarter of 2024. In October personal income rose a solid 5.3% YOY, up from 5% in September, and above the 49-year average of 5.2%. Real personal disposable income – which is key to personal consumption — increased 2.7% YOY, up from 2.6% a month earlier, and is just slightly below the 40-year average of 2.8%. The savings rate increased to 4.4% from 4.1%. In sum, personal income trends were improving for the average household.

Personal consumption increased a hefty 6.8% YOY in October, up from 6.6% in September, and well above its 40-year average of 5.4% YOY. This was due primarily to the consumption of services, which rose 9.8% YOY at the start of the fourth quarter, versus goods which increased 0.7% YOY. Yet it is also worth pointing out that since the beginning of the year the consumption of durable goods has been negative on a year-over-year basis which means the modest 0.05% YOY decline in October was a significant improvement. See page 3.

We noticed that government transfer payments were an important part of personal income growth in 2024 and grew a whopping 12.7% in October on a year-over-year basis. Total social security payments grew 6.9% YOY, Medicare rose 16.7% YOY, Medicaid increased 6.8% YOY, veterans’ benefits grew nearly 30% YOY, unemployment insurance payments increased 63% YOY, and other government subsidies increased 20% YOY. In many cases, the growth in government subsidies in 2023 and 2024 were retroactive adjustments to the high inflation rates seen in 2021 and 2022. The increases in social security and veterans’ benefits were due to a combination of a growing number of participants and COLA increases. The 20% increase in “other” government transfers was interesting but not surprising in a presidential election year. However, the 63% YOY increase in unemployment insurance surprised us and this suggests that Friday’s employment report for November will be important, and we will be looking to see if there is an adjustment to October’s release and if there is a significant rise in the number of unemployed in November’s report. See page 5.

The manufacturing sector has been the weakest segment of the US economy for a long while, but there may be green shoots on the horizon. The ISM manufacturing index, which has been contracting for 24 of the last 25 months, actually rose in November to 48.4 from 46.5 in October. Hopefully, this index will inch its way back above the neutral 50 level in coming months. President-elect Trump’s focus on increasing US energy production and manufacturing could help this trend in 2025. Overall, the details of the ISM report were mostly positive, and the new orders, production and employment indexes all moved higher. November’s data for the ISM service indices, which have been the strength of the US economy for the last two years and were strong in September and October, will be reported later this week. See page 6.

Technically Robust

While the S&P and Nasdaq Composite indices made new highs this week, most other equity indices have also recorded all-time highs recently, including the DJ Transportation and Utility averages, which makes Dow Theory positive. The Russell 2000 index has been testing its record high of 2442.74 on an intra-day basis, but to date, has failed to close above it. This will be the most interesting index to monitor in coming weeks. Nevertheless, the charts of the popular indices are positive and display good momentum. See page 9.

The 25-day up/down volume oscillator is 1.14, neutral, and relatively unchanged from last week. The good news is that this indicator is not yet overbought, which would be indicative of a stretched or vulnerable marketplace. However, since this indicator measures the level of volume supporting an advance, we would be concerned if the oscillator does not reach overbought territory in coming weeks to confirm the new highs. In sum, this indicator suggests there is room for the current rally to move higher, but we will be looking for volume in advancing stocks to improve. See page 10.

The 10-day average of daily new highs is 397 this week and new lows are averaging 64. This combination of new highs above 100 and new lows below 100 is a bit stronger this week and remains positive. The NYSE advance/decline line made a new record high on November 29, 2024. These breadth indicators are uniformly positive. See page 11. Last week’s AAII sentiment survey revealed there is no bullish extreme on the part of individual investors and this is good news. In fact, bullishness fell 9.6% to 31.7% and bearishness increased 5.4% to 38.6%. Bullishness is now below average, and bearishness is above average for the first time since April 24, 2024. All in all, momentum remains with the bulls, at least in the near term.

Gail Dudack

Click to Download