After Merry Pre-Holiday Rally, Fresh Job Data Due
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Welcome to the Schwab Market Update podcast, where we prepare you for each trading day with a recap of recent news and a look at what's ahead. I'm Keith Lansford, and here's Schwab's early look at the markets for Thursday, December 26th. Investors received an early Christmas gift from Wall Street Tuesday. Stocks rebounded to recover nearly all of last week's Fed-related losses, led once again by surging demand for tech stocks, especially big semiconductor firms.

Unlike Monday, however, buying interest was relatively broad and could contribute to spillover strength as this shortened week moves along. Retailers, automakers, airlines, restaurants, and hotels all participated in Tuesday's move, which marked the traditional start of the Santa Claus rally period that starts Christmas Eve and ends two sessions into the new year.

The strength this week moved the S&P 500 index back within 1% of all-time highs, where it stalled earlier this month amid inflation and rate concerns. Valuations are historically high, and Treasury yields have done almost nothing but climb. Keep in mind, too, that volume tends to be low this week, and Tuesday was a shortened session.

This might call into question how much conviction is behind the gains. The real test will come when everyone returns the week of January 6th to face down the January 10th non-farm payrolls report. Until then, Treasuries and big tech might call the shots. The 10-year Treasury note yield climbed above 4.6% on Tuesday, the highest since late May, and not far below this year's 4.73% intraday peak.

This came despite what Briefing.com termed strong demand for a $70 billion Treasury auction of five-year notes. Heavy demand at auctions this week could be a positive sign that yields are high enough now to satisfy investors, perhaps a hint of better fixed income demand ahead. The CME FedWatch tool now places odds of a January rate pause above 90% and dials in just two rate cuts next year, down from four not long ago.

The Fed is likely on pause for now, with the futures trading projecting more than 50% chances of no cuts at all during the first quarter of 2025, after three straight cuts totaling 100 basis points starting three months ago. Between now and the jobs data, some minor numbers might move yields. One occasion is this morning when weekly initial jobless claims roll out at 8.30 a.m. ET.

Consensus is 232,000 according to briefing.com following the prior week's 220,000. Neither is considered that high with 240,000 and above likely to raise eyebrows. Continuing claims were last at 1.874 million and haven't come down much from recent three-year highs. That's one metric the Fed is likely watching as policymakers keep their fingers on the pulse of labor trends.

Tomorrow brings November retail inventories and wholesale inventories, which don't typically move yields much. This is the quietest week of the year for earnings, with none scheduled in the next two days and none of note before the week of January 6th. Big bank earnings begin the following week.

Checking technical indicators, the S&P 500 index appeared to gather strength after last Friday's close just above what then was the 50-day moving average of 59.27. It dipped under that level briefly intraday Monday, but again found buying interest and rebounded to trade above 6,000 on Tuesday for the first time since last week's Fed-related sell-off.

The close near 6,040 put the S&P 500 right at the 20-day moving average, but still slightly below where it finished a week ago Tuesday before the Fed meeting. The firm equity picture contrasted with weakness in treasuries, suggesting investors remain in risk-on mode and are gravitating toward fixed income despite rising yields.

U.S. dollar also remains near recent long-term highs versus competing currencies. This, along with a stock market rebound and climbing yields, suggests investors still expect domestic strength. Recent earnings forecasts don't fight that impression, with analysts projecting nearly 15% euro-year S&P 500 earnings per share growth in 2025, according to research firm Faxat.

MegaCap stock that tend to be less sensitive to climbing rates, including Nvidia, Tesla and Apple, led the way earlier this week with the chip sector in pole position. Nvidia may be up in anticipation of a major speech in early January from CEO Jensen Huang, Barron's reported. This could represent a chance for the company to unveil more details about its next-generation Rubin chip.

Broadcom, now a $1 trillion stock like the Magnificent Seven, has been climbing almost without pause since its upbeat earnings report earlier this month that raised the company's AI profile. While yield-sensitive sectors, including real estate and utilities, lagged the rest of the market Tuesday, it's worth remembering that climbing yields in and of themselves aren't necessarily bearish if reflect hopes for better economic growth.

There's some of that in the mix, though inflation worries related to policies like tariffs and immigration also pumped up yields the last few weeks. All 11 S&P 500 sectors gained Tuesday, and the tech-heavy Nasdaq Composite enjoyed its best Christmas Eve performance since 2000, Barron's noted, climbing back above 20,000.

The S&P 500 index climbed to 65.97 points or 1.1% Tuesday to 6,040.04. The Dow Jones Industrial Average added 390.08 points or 0.91% to 43,297.03. And the Nasdaq Composite rose 266.24 points or 1.35% to 20,031.13.

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