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Monthly Economic and Investment Outlook

December 2024 Economic and Investment Outlook

United States

stock market bull statue
  • The initial focus on the November job report was how large of a rebound payrolls would experience on the reversal of the strikes and storm from the previous month. The economy added 227k jobs in November and the prior two months’ results were revised up 56k. The combination brought the 3-month average for payroll growth up to 173k from 143k, the strongest since May. The three categories driving payroll growth are healthcare (72k), leisure (53k), and government (33k). Broadly speaking, the underlying labor market conditions appear to be slowing.
  • The unemployment rate inched up to 4.2% from 4.1%. Earnings growth remained solid with average hourly earnings growth of 4.0% y/y, same as in October. Average hours worked ticked up marginally to 34.3.
  • The new administration is likely to impose fewer regulations, with some outright deregulation, a net positive for economic activity, potential GDP growth, and living standards.
  • According to The Regulatory Review from the University of Pennsylvania, medium-sized firms experience 47% more costs than small firms and 18% more than large firms to comply with regulations.

    Total Cost of Regulations By Year 
    Source: Doug Holtz-Eakin, American Action Forum

     

  • The headline personal consumption expenditures (PCE) increased to 2.3% y/y in October, compared to a 2.1% y/y increase in September. Core PCE, excluding the more volatile food and energy components, ticked up to 2.8% y/y versus the 2.7% y/y increase the previous month. Through October, grocery prices were up 28% from their pre-Covid level.


    US CPI Food at Home
    PSC Macro
         
     

  • U.S. consumer sentiment is significantly influenced by an individual’s level of income.


    US Consumer Sentiment
         
    PIPER SANDLER

Global

  • The European Union requires governments to maintain budget deficits below 3% of GDP and total debt below 60% of GDP. French debt has reached 111% of GDP, and the budget deficit is running at 5.5% of GDP. French total government spending is 57% of GDP and has been over 50% for more than 20 years. Total tax receipts are 52% of GDP. France may not have a budget deficit problem, but it may have a government spending problem.

    Federal and State and Local Governmentt Outlays
    PIPER SANDLER

          

  • The interest rate on French government debt now exceeds that of Greece. Recall that Greece was nearly kicked out of the Eurozone for fiscal irresponsibility during the great financial recession in the early 2010s.

    10-year bond yields
    PIPER SANDLER

                   

  • Chinese bond investors are not yet ready to bet on a sustained improvement in their economic data. China’s 10-year yield recently fell below 2% for the first time on record.

    chinese 10yr government bond yield

                   

  • Overall weakness in global manufacturing continues, as the percentage of countries with a manufacturing PMI above 50% (expansionary territory) is at 40.6% through November.

    Most manufacturing PMIs

                   

Fixed Income

  • The modest acceleration in core PCE inflation in October may give the Federal Reserve pause about lowering the fed funds rate later this month. However, the financial markets are broadly expecting a 25-basis point (a basis point is 1/100th of a percentage point) rate cut at the December Federal Open Market Committee meeting.
  • Powell said the Fed will determine the pace of easing based on how the economy progresses. In his words, “We’re trying to steer between the risk of moving too quickly and perhaps undermining our progress on inflation or moving too slowly and allowing the labor market to weaken too much. We’re trying to be on the middle path.”
  • Trump’s nominee for the Treasury Secretary, Scott Bessent, has put forth what he calls a “3-3-3” plan. Under the plan, deficits would be limited to 3% of GDP by 2028, GDP growth would reach 3% through deregulation and other measures, and oil production would increase by 3 million barrels per day, lowering the price of oil benefitting both companies and consumers.
  • President-elect Trump said at the start of his term in January, he will impose 25% across-the-board tariffs on imports from Mexico and Canada and increase tariffs on China imports by another 10%. The announcement may be more of a negotiating tactic with these countries, rather than an absolute certainty. However, should these tariffs be implemented, we would most likely see GDP growth slow, while inflation, the unemployment rate and the fed funds rate could all move higher.
  • There is much uncertainty regarding the timing and magnitude of the tariffs. We will monitor the situation and make tactical portfolio adjustments accordingly.
  • Net interest cost as a percent of tax revenues has reached levels not seen since the early 1990s. According to Strategas, levels above 14% begin to present challenges to the bond market, via higher interest rates. The weighted average cost of marketable debt is down significantly from the early 1990s but has increased almost 3X in the past several years. However, the amount of U.S. debt has increased 10X since 1990 to roughly $34 trillion.

     
    net interest cost and weighted average
           

Tactical Fixed Income Allocation

  • Neutral duration to the fixed income strategy’s respective benchmark as fixed income markets digest recent economic data and focus on U.S. budget deficits, net bond issuance, and increasing interest expense on outstanding U.S. debt.
  • Slight overweight to short-term investment grade corporates versus the respective benchmark to capture additional income with minimal incremental risk.

Equity Market

  • According to Strategas, S&P 500 earnings are forecast to grow by 11.6% in 2025. The Magnificent 7 are expected to contribute 4.2%, or more than a third, of the 11.6% expected net income growth for next year.

          
    sp500 2025 contribution
    Source: Strategas
              

  • The rally in the S&P 500 should continue to broaden as the percent of S&P 500 companies with positive 12-month percent changes in forward earnings continues to rise.



    percentage s&p 500 companies


  • Over the past 35 years, the percentage of unprofitable companies in the Russell 2000 has more than doubled to a recent 43.4%. Over the same time-period, the percentage of unprofitable companies in the S&P 500 remained flat at 5%.



    percent of non-earners

    Source: Strategas

Tactical Equity Allocation

  • Overweight to U.S. Large Cap stocks with an emphasis on equities with quality, cyclical, and strong cash flow characteristics.
  • Underweight to International Developed with no exposure to Emerging Markets. Although valuations remain attractive relative to U.S. equities, these asset classes may be pressured by a stronger U.S. Dollar and slower economic growth.
  • Slight exposure to gold to serve as a hedge, in a geopolitically tense global environment, and strong central bank buying.
Notices & Disclosures

Past performance is no guarantee of future results. Products and services offered through F.N.B. Investment Advisors, Inc. are not FDIC insured; and are not insured by any Federal Government Agency, are not deposits or obligations of or guaranteed by First National Bank of Pennsylvania or its affiliates and may go down in value.

The material has been extracted from various sources that F.N.B. Investment Advisors, Inc. believes reliable, but we cannot guarantee the accuracy or integrity of the material. This material is for your private information, and we are not soliciting any action based upon it. Any projections, market outlooks or estimates contained herein are forward-looking statements and are based upon certain assumptions. Other events that were not considered may occur and may significantly affect the returns or performance of these investments.

Any projections, outlooks or assumptions should not be construed to be indicative of the actual events which will occur. These projections, market outlooks or estimates are subject to change without notice. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product or any non-investment related content, made reference to directly or indirectly herein will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. You should not assume that any discussion or information contained herein serves as the receipt of, or as a substitute for, personalized investment advice.

To the extent that a reader has any questions regarding the applicability above to his/her individual situation of any specific issue discussed, he/she is encouraged to consult with their investment advisor. You can review your registered investment advisors or the investment advisory firm at the SEC's Investment Adviser Public Disclosure page - http://www.adviserinfo.sec.gov/IAPD/Default.aspxRedirect icon.

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