Change is Everywhere

January 2025

Equities were more volatile in the second half of December after Federal Reserve FOMC meeting. Fed Chair Jerome Powell cut the fed funds rate 25-basis points, which was expected, but lowered the number of expected 2025 rate cuts to two, which was a negative surprise. In response, the S&P 500 Composite fell nearly 3%, the worst daily performance in months. In our view, this extreme reaction to less Fed stimulus is a sign that speculators, which had been boosting share prices in 2024, were becoming a bit more cautious.

Nonetheless, it was a good year for stockholders. In 2024, the Dow Jones Industrial Average gained 12.9%, the S&P 500 gained 23.3%, the Nasdaq Composite inked a gain of 28.6%, and the Russell 2000 index rose 10.0%.

What made 2024 significant is that it was the second time in a row in which all three popular indices closed with double-digit gains for the year. This is a fairly rare occurrence. There have been times when all three indices had an additional third year of double-digit gains, such as in: 1943-1945, 1949-1951, and 1995-1999. The bad news is that each of these occurrences was followed by a significant bear market. The most memorable advance was seen in 1995-1999 (five years of double-digit gains), and it was followed by a major bear market that resulted in substantial annual losses for three consecutive years.

Double-digit gains for only two years in a row are more common and have been seen in: 1954-1955, 1975-1976, 1982-1983, 1988-1989, 2009-2010, and 2016-2017. Still, each of these occurrences was followed by negative or negligible annual gains in the subsequent year. In short, two years of double-digit gains does not tell us much about 2025. It could be a weak year or another year of double-digit gains, but it does suggest that 2025 could be an important and pivotal time for investors.

January tends to be an important month for equities and the Wall Street adage “As goes January, so goes the year” could have special meaning this year. The reason January tends to be significant is that liquidity is strong early in the year due to IRA and pension funding. Therefore, a weak January performance is ominous and suggests investors are avoiding equities.

At the end of 2024 Change appeared Everywhere

Political change appeared everywhere in 2024, particularly as the year ended. On December 8, 2024, President Bashar al-Assad of Syria fled to Russia after six decades of his family’s autocratic rule. This overthrow could be a major turning point in the Middle East, and it was an obvious blow to both Russia and Iran who backed Bashar al-Assad. According to Reuters, Senior US diplomats met with Syria’s de-facto new ruler Ahmed al-Sharaa, and after a “good” and “very productive” meeting about Syria’s political transition, the US removed an existing bounty on his head. At this early stage the transformation in Syria appears to hold great promise for positive, and potentially peaceful change in the Middle East.

Change is also impacting America’s allies. French President Emmanuel Macron is under extreme political pressure to rein in France’s fiscal deficit. German Chancellor Olaf Scholz is not expected to survive a February 2025 vote. The UK had a series of Conservative Party Prime Ministers after the pandemic, including Boris Johnson, Liz Truss, and Rishi Sunak, before a Labor Party upset brought the current Prime Minister Keir Starmer to power. The Conservative Party’s newly elected leader is Kemi Badenoch, a right-wing politician who opposes identity politics and state spending. She is also the Tories’ first black female leader. And in Canada, Justin Trudeau, is expected to face a formal motion of no-confidence in the House of Commons early this year.

Change is what also re-elected Donald J. Trump in November and won not only a majority in both the House and the Senate but a majority of all voters. This election was greeted with both jubilation and trepidation, domestically and abroad. Trump, the disruptor, has cobbled together a Cabinet full of potential disruptors who promise to bring transparency and common-sense change to the federal government. However, change will not be easy to achieve in Washington DC or be pleasant for everyone, so we would expect some pushback.

The appointment of Elon Musk and Vivek Ramaswamy to head the newly created Department of Government Efficiency (DOGE), is a unique experiment. In our opinion, the effort to bring efficiency to government may be Elon Musk’s greatest challenge to date. Nevertheless, the result of the November presidential election is a renewed focus on growing jobs in America, removing government regulations that hinder corporate growth, and controlling budget deficits. Each of these will require profound change and is what could make this year a time of both promise and potential turbulence.

Our 2025 Forecasts

Our assumptions for 2025 include GDP growth of 3.2% YOY, a 15% increase in SPX earnings, a maximum of two fed funds rate cuts, Treasury bill yields falling to 4.1%, Treasury bond yields at 4.3%, and inflation remaining sticky at 2.75. This combination results in our valuation model generating a predicted PE of 17.3 times and an SPX target of 5372 based on our 2026 earnings estimate. In short, the stock market is 40% overvalued by this benchmark. However, we must point out that at the end of 2021, 2022, and 2023 the market was also 30% or more overvalued by this benchmark, yet the market continued to climb higher. Liquidity and momentum have been overriding valuation in recent years and stock prices have been boosted by stocks benefiting or expected to benefit from the adoption of artificial intelligence. Moreover, household liquidity remains favorable and offsetting the risk in valuation are the fact that the US economy remains the global engine of growth, US is the home of many, or most of the companies benefiting from the future of artificial intelligence, and global liquidity remains high due to the sizeable global monetary and fiscal stimulus seen in the post-Covid era.

Conclusion

All in all, economic activity should remain relatively healthy in 2025 due in large part to the support given to the energy sector which will help to lower energy prices. This in turn lowers expenses for the household sector and improves margins in the corporate sector — a combination that potentially increases both consumption and corporate earnings. The incoming business-friendly administration is also expected to improve the growth path for the small business sector which is the source of over 45% of all jobs in America. Prior to his inauguration, President-elect Trump has already proven that he can get foreign companies to invest in the US, and that too, increases jobs which improves household income.

Overall, we expect top line revenue growth next year will lead to at least a 15% increase in S&P earnings and this should support further gains in the equity market. However, much of this was priced in during the November rally, and we would not be surprised if stock prices were flat to lower in the first quarter of 2025.

Gail Dudack, Chief Strategist

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Seems Like Old Times

DJIA: 42,342

Seems like old times … 2000 maybe? The market that year was great while it lasted, or should we say while the dot-coms lasted.  It was a market so divided they gave names to both segments – new economy and old economy. It was a market so selective you knew where you wanted to be, or should we say had to be to make money. We may not be quite there yet, and perhaps this market can pull itself together. But this is clearly more than your typical mid-December lull. NYSE A/Ds have been negative 9 of 10 days. For the S&P components, they even missed that up day!  This against the backdrop of decent strength in the Averages, including a recent high in the NAZ. Divergences like these never end well, though their end is more than a little elusive.

Divergences come in all sizes, which is to say length. A few years ago, 2018 as we recall, at the end of October there were three consecutive days of higher highs in the Dow and negative A/Ds. By the end of December the market had dropped 20%, despite the favorable December seasonality. Then there was the ‘87 crash in October, where leading up to it divergences had begun in May, only to worsen by October. By then, of course, most had come to believe the divergences didn’t matter. Most similar now, however, seems the dot-com period in 2000, the Mag 7 now filling a similar role. Just as the dot-coms dominated the NAZ then, so too have the Mag Seven done so now. Throw in this time the speculation in Bitcoin, and even worse the extremes in quantum stocks, it gets easier to say it’s 2000 again.

Bubble, no bubble, semantics don’t matter. There’s often a bubble somewhere, bubbles are not the problem. The problem is when bubble stocks are going up pretty much to the exclusion of everything else. In a way they are the lazy traders dream – you don’t have to look too hard for what is working, they are hard to miss. Narrow markets don’t often re-expand, especially those with a bubble tinge. Then, too, Decembers are often an analytical enigma.  For now the Round Hill Magnificent 7 ETF (MAGS-56), with just those stocks makes sense. The “493” isn’t all bad, but even the good charts are pretty much dormant. When this changes of course you’ll see it in those A/D numbers.

Obviously we favor the MAG 7. To those we would add several software shares which are holding reasonably well, namely ServiceNow (1075) and Salesforce (336). Semis, however, still seem a work in progress. And they are important in that we don’t recall many good markets without their participation. Some have even referred to them as the new Transports, suggesting Semis should confirm the Averages as Transports should confirm the industrials under the Dow Theory. There was Broadcom (218) this week, but then too there was Micron (87).  Possibly encouraging is the incipient turn in ASML (710) – above its 10 and 50-day averages. Among the Semis, this one could be predictive.

The A/D numbers have been particularly poor of late, not to the tune of Wednesday’s drubbing but hey, you never know. Blame Powell if you like, but economic growth seems more important than the next rate cut – there the story seems intact. And Powell is just trying to get ahead of possibly needing to raise rates in a Trump administration. The Fed is an excuse for what markets always do – they make the news. As much as the degree of the decline the idea of pretty much getting into everything in just one day has the look of wash out, and there was a spike in the VIX. Then, too, days like Wednesday are not typically one-ofs.

Frank D. Gretz

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US Strategy Weekly: To Cut or Not to Cut

The Federal Reserve is likely to lower interest rates by 25 basis points this week, but we doubt the Federal Open Market Committee will be unanimous in its decision and for good reason. In our view, at this juncture there is no need to lower interest rates and in fact, another rate cut could risk encouraging a rebound in inflation. But unfortunately, the Federal Reserve Board Chaired by Jerome Powell has never disappointed the consensus in the past, and we doubt this pattern will change this week. This predictability of the Fed is unfortunate because an obvious and dovish Federal Reserve emboldens speculation which is the opposite of what a central banker should do. In our view, Wednesday’s compromise will be that the Fed lowers interest rates by 25 basis points but makes a hawkish statement indicating that additional cuts may, or may not, be needed, in 2025. At least this will keep the consensus guessing in the near term, which is good.

Positives

There is a slew of indicators that suggest the economy is in good shape and may actually be accelerating as 2024 ends. The University of Michigan and Conference Board consumer sentiment surveys have both shown a significant boost in confidence in recent months. The NFIB small business survey jumped to its highest level since June 2021 in November. Consumer credit expanded by $19.2 billion in October and despite an increase in inflation, real personal disposable income grew a healthy 2.6% YOY in the third quarter. The National Association of Home Builders survey improved substantially in November and expected sales of single-family homes over the next six months jumped to 64, its highest level since April 2022. The pending home sales index rose 5.2 points in October to 75.8. Top-line retail sales were far better than expected in November, marking the third straight month of strong growth. This was the first time sales have grown strongly for three consecutive months in over a year.

Negatives

There are some areas of concern. Industrial production fell 0.1% in November following a downwardly revised 0.4% decline in October (previously -0.3%), leaving output 0.9% lower than a year earlier. This was the weakest annual rate since January. More importantly, despite the fact that the November jobs report showed an increase of 227,000 new jobs in the month, the household survey 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, and this is what led to the increase in the unemployment rate from 4.1% to 4.2%. However, the household survey also shows that the number of people employed declined by 0.45% YOY in November. This was the second contraction in four consecutive months, and it is significant because a steadily declining labor force is a classic sign of a recession. This could explain the Fed’s desire to lower interest rates.

Inflation Dilemma

Still, the Fed’s big dilemma in 2025 could be a resurgence in inflation. Headline inflation accelerated for the second month in a row in November, rising 2.75% (which the BLS rounded to 2.7%) year-over-year versus 2.6% in October. Core CPI rose 3.3% YOY, unchanged from a month earlier. Note that headline CPI speeded up even though the energy component fell 1.7% for the month and 3.2% YOY. Also notice that all major segments of the CPI rose more than the headline number except for transportation, and lesser components such as education and communication, recreation, and apparel. See page 3.

On a positive note, both headline and core CPI have been below the 77-year long-term average of 3.7% YOY for many months; but unfortunately, prices have now become sticky, and several areas of the economy — such as airline fares — are experiencing price acceleration. In particular, one of the Fed’s favorite benchmarks — all items less shelter — rose 1.6% YOY up from 1.3% in October and is up from 1.1% in September. Most economists are encouraged that shelter inflation was 4.7% YOY in November, down from 4.9% in October and owners’ equivalent rent was 4.9% YOY in November, down from 5.2% in October. Nevertheless, while shelter inflation may be decelerating (some of this due to falling energy costs), it remains elevated. See page 4.

Energy costs were the initial driver of inflation; however, service sector inflation is the current problem, and the broad service sector saw prices rising 4.5% YOY in November, down a bit from 4.7% in October. Conversely, medical care costs which averaged 0.2% YOY gains in 2023, rose by 3.1% YOY in November and have been rising 3% YOY or more for the last seven months. The only consolation to the sharp rise in medical care costs is that price spikes seem to appear every four years and should be peaking in 2024. See page 5.

Wages grew 3.9% YOY in November versus the CPI’s 2.7% YOY pace and have been growing faster than inflation since May 2023. This is a potential problem since it means that inflation may be making a classic shift from being supply-driven to demand-driven. We believe the Fed sees this risk but is either ignoring it or is more concerned about a weakening labor market. With inflation at 2.7%, assuming the Fed announces a 25-basis point cut this week, the real fed funds rate would fall from the peak of 280 basis points seen in August to 160 basis points this week. This 160 basis points would still be above the long-term real fed funds rate average of 130 basis points but is a dovish move and we think the timing would be poor. See page 6.

Price Action

The Dow Jones Industrial Average closed down 267 points on Tuesday, for its ninth-straight day. According to FactSet, this index has not had nine consecutive down days since February 1978, so this decline is gaining attention. However, we would point out that the other indices have not had the same trend, and this Blue Chip index has several unique factors that explain its weakness. First, Nvidia Corp. (NVDA – $130.39) replaced Intel Corp. (INTC – $20.44) in the DOW 30 on November 8, 2024, and the stock peaked at a price of $148.88 on November 7, 2024. The subsequent sell-off in NVDA is a phenomenon that often happens to new stocks added to an index due to pre-buying. In addition, United Healthcare Group Inc. (UNH – $485.52) has been in a tailspin since the murder of UnitedHealth CEO Brian Thompson on December 4, 2024. This horrible event has become a flashpoint for the healthcare industry and a group of lawmakers are pushing to force health insurers to sell pharmacies. Our technical indicators remain positive, but there have been signs of deterioration in the past week. The 10-day average of new highs is now over 100, turning the new high/new low index from positive to neutral. It is also mid-December, and strong cross currents always occur at year end. We believe the stock market will move higher but fear it may peak around Inauguration Day since a lot of good news has already been factored into prices. In addition, the S&P 500 index is currently trading at 25.9 times trailing earnings. Historically, only stock market bubbles have reached 30 times earnings. See page 8.

Gail Dudack

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US Strategy Weekly: The Donald Effect

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

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Bullish, Who Isn’t?

DJIA: 44,765

Bullish … who isn’t? Sure that’s a worry but for now we wouldn’t get caught up playing contrarian.  One of our favorite quips here is that investors are wrong at the extremes, but right in between. The evidence says we’re in between. The evidence says higher. Part of the evidence is the time of year. History says higher pretty much between now and early January. Importantly, backing the seasonal pattern is the technical evidence – positive A/Ds, 70% of stocks above their 200-day, and so on. At an anecdotal level, you have to be impressed too with the market’s lack of reaction to tariff threats, an excuse to selloff were the market so inclined.

Also pointing to higher prices is the often-maligned VIX or Volatility Index.  Since its inception in 1990 the VIX average close is 19.5. There was a significant surge during the summer which saw the Index hit an intraday high of 65, but it since has settled into a range between 14 and 23 as events like the election have kept the number elevated. It closed last week below 14 which, following a drop from above 20, has proven significant, producing positive returns for the S&P.  Additionally, there is a measure called the last hour indicator which as the name suggests, measures the S&P only in the final hour of trading. The logic here is that professionals trade/invest in the last hour, making the action important. It was recently positive 9 of 10 sessions, which historically has led to higher prices, according to SentimenTrader.com.

If the MAG 7 were their own market, they apparently would be the world’s second largest next only to the US. Certainly impressive, but not necessarily an insight into where they’re going. Until very recently the market had been led primarily by financials and secondary stocks, demonstrated by the Russell 2000 or the Equal Weight S&P and NASDAQ 100. This seems to be changing, not necessarily to the detriment of those areas, but certainly to the benefit of much though not all of Tech. Software shares have performed well for some time, aided recently by the gaps higher in Salesforce and ServiceNow. The change is also evident in the MAG 7, which obviously benefits the weighted averages versus the unweighted. Semiconductor shares for the most part still have something to prove.

We came upon Marvel (113) last weekend thanks to football. Watching some of those games we wonder if God didn’t create football just as an opportunity to go through the charts. Charts, by the way, are a good example of how mechanical technical analysis can be — support, resistance, trendlines, and so on.  Art may be too strong a word, but there is a subtle side to this analysis of supply and demand. In the case of MRVL last weekend, it wasn’t the good chart per se, it was the good chart amongst the preponderance of bad charts in that semiconductor group. It’s that failure to fail idea. You can also think about this in terms of the market as a whole. Bad news, bad numbers, war, whatever, and the market fails to go down — that tells you something. Or, war in the Middle East and oil fails to go up. In any event, football can be profitable.

Wednesday’s was a good market, a good market overall but particularly in the market averages. Yet A/Ds barely turned positive at the close, having been negative most of the day. This clearly seems about what we spoke of last time, the broad groups of energy and financials failing to show. As much as we focus on participation this doesn’t seem an issue, rather a reflection of the recent shift to Tech. Shifting rather than losing participation seems the important point here.   Tech is a broad group but not quite as homogeneous as Financials. Powell’s economic comments on Wednesday were surprisingly positive, something Parker Hannifin (695) and Grainger (1189) have been saying for a while. Friday’s jobs number shouldn’t be an issue even if bad, but could offer another insight to the market’s health.

Frank D. Gretz

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US Strategy: Ignoring the Chaos

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

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US Strategy Weekly: Happy Thanksgiving to All

As we prepare for a day of Thanksgiving, we want to express our appreciation and gratitude to all DRG clients and thank you for your continuing support in 2024. We wish you and your loved ones a special Thanksgiving gathering and a happy and healthy holiday season.

Much Ado About Nothing

The equity market continues to score a string of new all-time highs in contrast to, and in the face of, a slew of headlines such as Reuters’ “Trump tariffs would harm all involved, US trade partners say” and “GM and other US automakers would take big hit from Trump tariffs” or AP News’ “Trump’s economic plans would worsen inflation, experts say.” But the dichotomy between the press and the market is not a surprise to us. We would put many of these media articles in the same category as political polls, fun to read, but biased and often wrong. It is true that financial markets can get overly emotional at major tops and bottoms, but in general, markets tend to be more logical and accurate in terms of assessing the trend of the economy and earnings. Perhaps it is because real money is involved and there are real consequences.

Moreover, technical analysts will assert that “in price there is knowledge” and we have found that technical analysis brings excellent discipline to our work. Price trends and shifts will undeniably prove you right or wrong well before one has the ability to see a change in an earnings trend. And it is clear that the markets are celebrating Trump’s victory and are in sync with his policies, including tariffs. Given the headlines in the financial press, one might ask why.

In terms of “Trump’s tariffs,” investors do have President-elect Trump’s first administration to use as a history lesson. Even though tariffs were put in place in 2018, GDP strengthened, and inflation fell during President Trump’s four years. And in the midst of a number of articles bashing tariffs, the Wall Street Journal published a piece entitled “How Trump’s Tariffs on China Changed US Trade, in Charts” (see link below*) which demonstrated that between 2017 and 2023, tariffs created a seismic shift in production and imports away from China and to countries like Mexico, Vietnam, Taiwan, and Malaysia. Shifting US dependence on Chinese imports was the purpose of Trump’s tariffs and it was successful. Not surprisingly, the Biden administration continued Trump’s tariff policies. It now appears that President-elect Trump plans to use tariffs to dissuade China from exporting deadly fentanyl into the US through Mexico and Canada. If successful, he would be the first president in US history to curb the illegal drug trade into the US. Most importantly, we believe Trump will impose tariffs if needed, but also think he can succeed in changing policy without having to enforce tariffs. Keep in mind that Donald Trump is not a politician by profession, but he is a professional negotiator: And he wrote “Trump: The Art of the Deal.”

Raising Earnings Estimates and Equity Allocation

The goals of President-elect Donald Trump’s nominee for Secretary of the Treasury, Scott Bessent, are also important and supportive for both the equity and debt markets. Summarized as 3-3-3, Bessent describes Trump’s US economic plan as getting the annual federal deficit down to 3% of nominal GDP, increasing GDP growth to 3%, and increasing US oil production by an additional 3 million barrels per day. This plan, plus his support of using tariffs as a negotiating tool to implement policies that benefit US workers and improve the US economy is another example of good business sense, in our view. (For example, General Motors Company [GM – $ 54.79] may find it more economical to shift auto production to the US from Mexico.) All of this, coupled with a reduction in regulatory red tape, particularly for small businesses, gives us confidence that corporate earnings can increase in 2025 more than previously expected. Therefore, we are raising our 2025 S&P earnings estimate from our below consensus $255 to $270, representing a 15% YOY increase. We are also initiating a 2026 above-consensus earnings estimate of $310.50.

In both cases, these earnings estimates could prove to be conservative if energy production is able to ramp up quickly (difficult to accomplish), merger and acquisition activity increases as expected, and the US sees a revitalization of domestic manufacturing. All three of these would increase employment, personal income, and personal consumption. We are also increasing our equity allocation to 60% and reducing cash holdings by 5%. Because the market appears to be discounting much of the good news expected in 2025 and 2026, a correction seems likely in the first quarter of 2025, and therefore, we are keeping some cash on the sidelines. However, we would make another 5% shift should equities suffer any significant market weakness.

Technical Momentum

Most equity indices have recorded a series of all-time highs recently, including the Dow Jones Transportation Average (a positive Dow Theory signal) and the Dow Jones Utility Average (which is unusual, but the DJ Utility Average has become linked to the growth in artificial intelligence). Price trends and momentum are favorable. The Russell 2000 index tested its record high of 2442.74 on an intra-day basis, but to date, has failed to close above it. In coming weeks this will be the most interesting index to monitor. See page 8.

The 25-day up/down volume oscillator is at 1.06, neutral, and up from last week. The good news is that this indicator is not yet overbought, which would be indicative of a vulnerable marketplace in need of correction. 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 and confirm the new highs. Nevertheless, daily volume was greater than the 10-day average for the last several trading days and that is encouraging. See page 9.

The 10-day average of daily new highs eased to 329 this week and new lows are 81. This combination of new highs above 100 and new lows below 100 is a bit weaker but remains positive. The NYSE advance/decline line made a new record high on November 25, 2024, which is favorable. In sum, breadth indicators are uniformly positive. See page 10.

Housing and Sentiment

Total housing starts declined 4% YOY in October, to an annualized rate of 1.311 million units. Single-family housing starts declined 7% while multifamily construction increased 10%. Permits fell 7.7% YOY and single-family permits fell 1.8% YOY. The NAHB Housing Market Index indicated that about 60% of builders used sales incentives to make a sale in November. According to Moody’s Analytics, if all else were equal, the rate on a 30-year fixed mortgage on a typical home would need to fall by 460 basis points to restore the level of housing affordability seen in 2019. See page 3.

New home sales fell in October to 610,000 units, down 9.3% YOY, but still above the pre-pandemic level of 600,000. Nearly all the decline occurred in the South, down 27.7% YOY, due to hurricanes Helene and Milton. Existing home sales rose to 3.96 million (SAAR) in October, up 3.4% from September and up 2.9% YOY. Sales remain below the 10-year average due to elevated mortgage rates; however, the single-family segment rose 4.1% YOY. The existing median home price rose to $407,200, up 4% YOY. Overall, the housing market is sluggish but primarily due to high interest rates. See page 4. *https://www.wsj.com/economy/trade/how-trumps-tariffs-on-china-changed-u-s-trade-in-charts-bb5b5d53?page=2

Gail Dudack

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US Strategy Weekly: Challenges Ahead

Global markets were choppy, but higher in recent trading even though President Vladimir Zelensky of Ukraine marked the 1,000th day of the Russian invasion by attacking an arsenal inside Russia with US-made ATACMS missiles – all with lame-duck President Joe Biden’s approval. Russian President Vladimir Putin retaliated by signing a new threatening nuclear doctrine that lowers the threshold under which Russia might use nuclear weapons. Markets were anxious, yet, for a small rise in energy prices, surprisingly not impacted by this dangerous escalation of war in Europe.

In addition, Russian interference is suspected in the damage to two undersea fiber-optic communication cables in the Baltic Sea—one between Lithuania and Sweden, and the other between Finland and Germany. Germany’s Defense Minister Boris Pistorius said this should be regarded as sabotage.

Nonetheless, global investors appeared to be less interested in geopolitics and more interested in President-elect Donald Trump’s cabinet picks, which continue to dominate the news feeds on a regular basis. There is no doubt that there will be changes under the new administration, particularly since many of the candidates Trump has selected seem primed to make a sweeping overhaul of Washington, DC.  

This political shift inspires us to make some initial changes to our sector emphasis. The proposal of Robert F. Kennedy, Jr. as the new Secretary of Health and Human Services is likely to shift the government’s emphasis from medicines and pills to “healthfulness.” And we expect the new administration will be less likely to mandate vaccines (a major boon for big pharma over the last five years) while also looking for ways to downsize Medicare/Medicaid expenditures. This leads us to downgrade the healthcare sector from overweight to neutral this week. And assuming Trump will succeed in his promise to Middle America to create and retain jobs in the US, we are upgrading the consumer discretionary sector from neutral to overweight. See page 15.

And as we wrote last week (Post-election Euphoria, November 13, 2024, page 1), “The appointment of billionaire Elon Musk and entrepreneur Vivek Ramaswamy to a newly created Department of Government Efficiency may be Trump’s most interesting and challenging “disruptive” effort yet. It may be Elon’s greatest challenge as well; but if successful, it could be revolutionary and move the needle on the federal government spending and the federal deficit.” In our view, this new department of the federal government may also be the source of new investment ideas in the longer run.

2025 Challenges will include the Deficit

However, President-elect Trump will have a host of challenges when he takes over the Oval Office, and along with trouble in the Middle East, Russia/Ukraine, making the federal government more efficient and agencies more responsive and responsible, he will also inherit a massive federal deficit.

In October 2024, the first month of the fiscal 2025 year, the deficit was $257.45 billion, up from $66.56 billion in October 2023 and it was the 71st consecutive October that federal receipts fell short of outlays. This deficit represented 6.9% of nominal GDP and was well above the average of 6.1% recorded in fiscal 2024 or the 6.5% seen in fiscal 2023. However, in 2022, the average debt-to-GDP was even higher at 7%. One reason for this was that the IRS allowed individuals and corporations affected by natural disasters to delay filing their taxes from April to November 2023 and this resulted in higher-than-usual receipts in October and November 2024. Adjusting for various timing effects of other federal outlays suggests that the increase in total outlays from October 2023 to October 2024 would have been around $40 billion instead of the reported $114 billion. Still, total receipts were 19% lower and total outlays increased 24% from October 2023. Some of the outlays were to fill the Veterans’ Administration’s $12 billion budget hole. Even so, in the past year individual income taxes fell 24%, corporate tax receipts plummeted 73%, and the deficit is bleeding red ink.

All in all, the fiscal 2024 deficit of $1.83 trillion was 8.1% larger than in 2023 and as a percentage of nominal GDP increased 0.3% to 6.4%, the largest deficit during an economic expansion since World War II. The federal government borrowed $2.3 trillion in fiscal 2024, bringing total outstanding debt to $35.46 trillion, a 7% increase from the previous fiscal year. Since nominal GDP was $29.35 trillion in the third quarter, this means outstanding debt to GDP rose to 121% in September. Interest payments were more than 13% of total federal outlays in 2024. In sum, these deficits will be a huge burden to the bond market in 2025. See page 7.

Inflation is Not Going Quickly

Headline CPI increased 2.6% YOY in October, up from September’s 2.4%. Energy was unchanged month-to-month on a seasonally adjusted basis, but down 1.1% month-to-month when not seasonally adjusted, and down 4.9% YOY. Gasoline prices were down 12.2% YOY. In other words, lower energy costs substantially helped headline CPI in October. Core CPI rose 3.3% YOY, which was unchanged from September, but many segments of the CPI index increased more than headline on a month-to-month basis. In particular, other goods and services rose 0.4%, medical care increased 0.3%, recreation was up 0.3%, and housing rose 0.2%. See page 3.

The downtrends in headline and core CPI are clearly on pause since headline CPI is ticking up for the second month in a row and core CPI at its highest level since May 2024. In addition, a variety of core CPI indices have been trending higher in recent months. See page 4. This means it is possible that the Fed may pause in December, or until there is more economic data to suggest another rate cut is necessary.

Since many economists appear to be singularly focused on housing, particularly owners’ equivalent rent, they can take solace in the fact that this segment of the CPI continues to ratchet lower, although it remains relatively high at 5.2% YOY in October. The same is true of the broad service sector, which is moving lower, but at 4.7% YOY remains well above the Fed’s target of 2%. More importantly, some service sector areas are reporting that prices are trending higher. In October, health insurance rose 6.8%, motor vehicle maintenance and repair rose 5.8%, medical care rose 3.3%, and other goods and services increased 3.3% YOY. See page 5.

There was good news this week from the National Association of Home Builders which announced that their confidence index inched higher for the second month in a row in November. And Walmart Inc. (WMT – $86.60) raised its annual forecast for the third consecutive time indicating that consumers are buying more groceries and merchandise.

Technical Update This week brought little change to our technical indicators and though the major indices have given back half of their pre-and post-election rally, they continue to show positive momentum. There are a few signs of deterioration in the 10-day averages of new highs and new lows and our 25-day volume oscillator is yet to record an overbought reading indicating a lack of upside volume. This, plus the lack of a new high in the NYSE advance/decline line since October 18, 2024 suggests the Trump rally may be extended near term. Nevertheless, seasonality and a history of yearend gains following most presidential elections favors the bulls.

Gail Dudack

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So Far So Good for Trump 2.0

DJIA: 43,750

So far so good for Trump 2.0 … but can these knee-jerk reactions be trusted? Specifically, are knee-jerk reactions to elections to be trusted? The answer, of course, it depends. Interestingly, it’s the character of the reaction that’s important, the rally in stocks being only a part of it. Gold has been almost surprisingly weak, but based on history that has been positive – strong Gold has been associated with poor returns. Other positive elements include the strong dollar and the decent A/Ds. The rally so far has seen simultaneous all-time highs in what can be called the cyclical areas of discretionary stocks, Industrials, Financials, and Tech. Strength in these areas has lead to positive future returns.

Not all of Tech is being treated equally, at least when it comes to Software and the Semis. The latter is apparently being viewed as a Biden legacy – the Chips Act.  This likely will change, but unlikely to the detriment of Software.  We have always thought that someplace along the line there would be a speculative blowoff of sorts, and we suppose Bitcoin is threatening. Quantum computing stocks, many of which are low priced, also seem on the move. IONQ (26), where the company and the symbol are the same, also has been strong. And then there are the power companies like Talen (203), which just reported a good number, and Vistra (139). Like AI and data centers there are associated companies here like Nuscale (25) that builds the small reactors. Meanwhile, while still a good chart, we wonder how many Democrats will be Tesla (311) buyers.

Could Gold and Bitcoin actually be the same? Ever notice you never see Superman and Clark Kent together? Similarly, you never seem to see Bitcoin and Gold go together.  As much as they try, Gold and what drives it is hard to explain. It’s said Gold is an inflation hedge, yet in 1929 and after it proved a hedge against deflation. Similarly, Gold has ignored many opportunities to rally in times of trouble, even panic. It seems to cycle in a timeframe unknown to mere mortals. What is troubling Gold now seems the dollar strength, but who knows – correlation doesn’t mean causation. Or maybe the trouble with Gold recently is Bitcoin and its success.  Gold on this pullback looks attractive, as does Bitcoin.

To borrow from the Graduate, the word is garbage. More tastefully, Waste Management (222), Waste Connection (184), and Republic Resources (209). No tariffs, no supply chain problems, plenty of demand and excellent charts, what’s not to like.  They also fit the category of what we call long-term uptrends, with decent short-term patterns. The obvious advantage for these stocks in long-term uptrends is having the proverbial wind at their back. And there’s reason for these patterns – a franchise, superior management, whatever. People like to say they’re long-term investors, yet they end up buying stocks in long-term trading ranges. Among other stocks in this category are the often-mentioned Cintas (217), Grainger (1176), and Parker Hannifin (698). Back on track also seem Accenture (370) and McKesson (625).

So what could come undone? For stocks, as always it’s about the average stock, the A/Ds and stocks above their 200-day, not the Averages. All fine for now and not to look for trouble, but what might change? For stocks, that could be bonds, which already seem a worry. Rates surged on the election results on the fear of what tax cuts and tariffs would mean for inflation. They since have settled but they are important together with the A/Ds.  To curb too much enthusiasm you might consider this. The two markets have nothing in common, so for now it’s just coincidence it, but at this very early stage this market is tracking the very early Hoover Post-Election market in 1928.

Frank D. Gretz

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US Strategy Weekly: Post-election Euphoria

In the four trading sessions following the election, the equity market recorded stunning gains of 3.8% in the S&P 500 index, 4.9% in the Dow Jones Industrial Average, 4.7% in the Nasdaq Composite index, and a remarkable 7.7% in the Russell 2000 index. The pace of this action was amazing and euphoric, but unsustainable. However, the momentum underlying the rally suggests stock prices will continue to advance. Moreover, equities tend to advance in the two months following a presidential election, and November through January has historically been a good period for equities. We expect stocks will move higher in the near term.

The stock market is a good, but imperfect, discounting mechanism, and our only concern is that equities are pricing in much of the good news expected from a four-year Trump presidency. But only time will tell. Still, we are not surprised stocks are celebrating since President-elect Trump’s business and energy friendly platform is clearly positive for corporate profits. Equally important, Scott Bessent, CEO and chief investment officer of Key Square Group, and a current candidate for Secretary of the Treasury in the Trump administration, wrote a Wall Street Journal opinion article on November 10, 2024 emphasizing the need to restart the American growth engine, address the federal debt and preserve the dollar’s role in the global economy. The fact that the new administration will have a focus on reducing the debt-to-GDP ratio is a significant step in the right direction and lowers our angst on a topic that we believe will be crucial in 2025. Link to the article: https://www.wsj.com/opinion/markets-hail-trumps-economics-he-will-repair-biden-damage-pro-growth-investment-boost-f3954dbe

President-elect Trump has always been a disruptor (something that causes radical change in an existing industry or market by means of innovation) within the federal government, which may be at the core of why he attracts so much animosity. Most people do not like change and government officials like it less than most individuals. So, his appointment of billionaire Elon Musk and entrepreneur Vivek Ramaswamy to a newly created Department of Government Efficiency may be Trump’s most interesting and challenging “disruptive” effort yet. It may be Elon’s greatest challenge as well; but if successful, it could be revolutionary and move the needle on the federal government and the federal deficit.

In terms of the post-election rally, what we believe is most favorable is that it has been led by small capitalization and financial stocks. The action in the Russell 2000 index is a sign that investors feel good about the future of the US economy and the earnings potential of small businesses. Furthermore, participation in small capitalization stocks is what has been missing in the market’s advance for over two years and has been at the root of less-than-favorable breadth statistics. Plus, every sustainable bull market cycle has been led by financial stocks, particularly the banking sector. At the core of any good economy is a solid banking system and without good price action in bank stocks, an equity advance is questionable. In sum, the market’s reaction in recent days has been bullish.

In terms of breadth data, our 25-day up/down volume oscillator is 0.68 and neutral. The good news is that this indicator is not overbought and not signaling a major correction. However, since this indicator measures the level of volume (or conviction) behind any advance or decline, the bad news is that this indicator is not yet overbought. With most of the indices at or near all-time highs, in the days or weeks ahead, it is important for this indicator to confirm the advance with an overbought reading of at least 5 consecutive trading sessions. See page 11.

Last week was also FOMC meeting week and the 25-basis point cut in the fed funds rate was no surprise to investors. This week there will be new data regarding inflation for the month of October and it will be the first of two CPI releases before the next Federal Reserve Board meeting on December 17-18. Fed watchers have become mixed in their view of whether there will be another rate cut next month, but in our opinion, the long end of the Treasury curve is more important at this juncture since it impacts consumers more directly. Consumer credit outstanding expanded by $6 billion in September, short of expectations for a $14.5 billion gain, and less than August’s downwardly revised gain of $7.6 billion. The increase in credit was driven primarily by growth in the nonrevolving segment, which added $5 billion while revolving credit added $1 billion. Revolving credit grew a mere 0.9% at an annualized rate, and 4.9% YOY versus the 10.3% YOY pace seen a year earlier. See page 6.

The reason we are closely monitoring credit is that negative growth in revolving credit is often a signal of a recession. The trend in consumer credit has not turned negative but it has been decelerating. And despite a recent string of fed fund rate cuts, consumer finance rates remain stubbornly high. The delinquency rate on credit card loans has been trending higher and was 3.25% in the second quarter, up from 3.15% in the second quarter. Data for the third quarter should be release later this month.

Productivity increased to 2.2% in the third quarter, up from 2.1% in the second quarter, and this increase appeared even though GDP growth slowed from 3.0% to 2.8% in the same period. Since the rate of productivity usually follows the pace of economic activity, this bump in productivity is good news for employers. Labor productivity rose due to lower unit labor costs. However, a better measure of labor cost is the employment cost index, and this was also favorable since it decelerated in the third quarter from 4.1% YOY to 3.9% YOY. See page 3.

While trends in employment costs were uniformly lower in the quarter, the actual levels were different between private industry and government workers. Government workers in this analysis represent state and local employees, and here total compensation grew 4.7% YOY, wages and salaries rose 4.6% YOY, and benefits rose 4.8% YOY. This compares to private sector employees where total compensation rose 3.6% YOY, wages and salaries grew 3.8% YOY, and benefits increased 3.3% YOY. See page 4.

Third quarter employment costs were also distinctly different between union and nonunion employees. For union workers, total compensation rose 5.8% YOY, wages and salaries grew 6.4% YOY, and benefits increased 4.9% YOY. Note that these numbers would not have included the results of the Boeing strike. However, the large union increases in 2024 are likely a catch-up from the below average increases seen in 2021 and 2022. Nonunion total compensation rose 3.4% YOY, wages and salaries increased 3.8% YOY, and benefits rose 3.1% YOY. See page 5. The NFIB small business optimism index rose 2.2 points in October to 93.7, returning to the level seen in July. The surprise was the record high in the NFIB uncertainty index of 110, however, this poll was taken before the election. There were only a few big moves in October. One of these was the business outlook which rose from negative 12 to negative 5. The area of concern is that actual earnings changes were a bit better at negative 33 from negative 34, but actual sales changes fell from negative 17 to negative 20. See page 7.

Gail Dudack

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