Inflation may be sticky, but earnings are bringing holiday cheer.
I have always loved the story of How the Grinch Stole Christmas! by Dr. Seuss. For those of you who may not remember this classic, the Grinch is a tall green crotchety hermit who lives alone on a mountain that overlooks a village, known as Who-ville, that happily celebrates Christmas annually. He watches them year after year, until he hatches a plot to steal everything so that they won’t be able to celebrate.
But when he makes off with all their decorations, presents and food, he finds that they still celebrate Christmas either way, and do so gratefully and joyfully. This shocks him. As the narrator says, “…And he puzzled three hours, till his puzzler was sore. Then the Grinch thought of something he hadn’t before! ‘Maybe Christmas,’ he thought, ‘doesn’t come from a store. Maybe Christmas… perhaps… means a little bit more.’”
The meaning in How the Grinch Stole Christmas! is that the holiday is indelible and non-material; it is ethereal and internal. It is about community, and love, and gratefulness, and so cannot be determined by material factors (the same can be said for other traditional celebrations like Chanukah and Kwanzaa). The celebration will still happen, no matter what the Grinch does to try and stop it. In the end, the Grinch gives back all the decorations, gifts, and food and Christmas is had by all. The steal was only temporary.
Pondering the anxiety building around 2025, I am reminded of this story and how, as we face the turn of the calendar each year, we worry. We worry about whether the economy will be good or bad in the year to come. We worry about interest rates, inflation and unemployment. We worry about stock prices. We worry about geopolitical risks and war. We worry about our loved ones and our health, finances and security. Our worries sneak in and—like the Grinch—steal away faith in our long-term thinking and planning, casting a pall over our hopes, dreams, plans and celebrations.
As investors, we can face these worries by taking a historical perspective. Going back nearly 90 years, the average bull market lasts 4.9 years, returning a cumulative average of 177.6%, while the average bear market lasts 11.3 months with an average cumulative loss of -35.1%. While we do expect more volatility in the months ahead, when we look at where we may be in 2025 and beyond, believing in the long-term growth of the market is less risky than not.
With that, discipline is also important, which is why rebalancing portfolios is equally important to achieving long-term goals. Especially when we are seeing a set of complications on the horizon, and stocks are priced for perfection in some pockets of the market.
This week, multiple reports of inflation have demonstrated how disinflationary progress has stalled. The consumer price index (CPI) showed consumer prices rose 2.7% in November, an acceleration from the 2.6% annual increase in October. November’s data represents the largest annual increase in four months and the second consecutive month of acceleration from the previous month’s pace. Likewise, producer prices rose 3.0% year-over-year last month, surpassing the 2.6% gain expected and up from the 2.4% annual increase in October. At 3.0%, this marks the largest annual rise since February 2023.
These data points may not be enough to hold the Federal Reserve back from another interest-rate cut of 25 basis points next week, but it could certainly cause the central bank to communicate another pivot in policy. A shift to a more hawkish tone with material revisions in the forecast for additional policy adjustments over the next 24 months could be on the table. Without the dovish tailwind we’ve had over the last year-plus, stock prices may be vulnerable to a reset as well.
And yet, we continue to see many stocks put up the kind of earnings growth that bring holiday cheer. Semiconductor giant Broadcom and retailer Costco both reported after last night’s close, and Broadcom’s results showed revenue increased 51.2% year over year to $14 billion, boosted by 220% growth in artificial intelligence (AI) revenue. Meanwhile, Costco announced results that beat estimates on the top and bottom lines in its first earnings report since raising membership fees.
And it is not just large companies posting up good results and feeling positive about the future: The National Federation of Independent Business (NFIB) Small Business Optimism Index jumped eight points from 93.7 to 101.7 in November, surpassing the expected 1.5-point gain to 95.2. This is the highest small business confidence reading in more than three years. The report showed that nine of the 10 index components rose in November, with the outlook for business conditions reaching its highest level in more than four years.
Whether the Grinch will steal some of the market’s gains in 2025 is unclear but we are making adjustments in order to be positioned to cope with that possibility—without losing sight of your long-term goals and our prudent tax management approach. Markets climb walls of worry quite often, but just like the villagers of Who-Ville, we will continue to focus on what matters. We urge you to strive to do the same.
Thank you for your interest in our weekly investment commentary. If you would like to speak personally with a member of your advisory team, please call 833.RWA.PLAN (833.792.7526).