Short Session Follows Two-Day Recovery Effort
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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 is Schwab's early look at the markets for Tuesday, December 24th.

Today's shortened session comes on the heels of a slight recovery over last week's Fed-induced sell-off. However, with stocks due to close at 1 p.m. ET and bonds an hour later, traction might be hard to come by ahead of Wednesday's holiday closure. Christmas Eve is often, but not always, the start of the Santa Claus rally, a period that runs through the second trading session of the new year and historically brings about a 1% upward move.

It's not guaranteed, of course, and some of the usual holiday exuberance might have been pulled forward on the post-election climb to record highs. Monday marked the second session in a row of recovery, but many names got left out even as semiconductors posted big gains.

One sore point remains the Treasury market, which took another hit Monday and sent the 10-year note yield back towards 4.60%. That's about where it topped last week and the highest since late May. It's also not far from this year's 4.73% intraday peak. Monday's pressure on Treasuries, which move the opposite direction of yields, came despite what Briefing.com called stellar demand for a $69 billion two-year note auction Monday.

Today features a $70 billion five-year note auction. Strong demand at auctions a few weeks ago also helped cool yields at least for a few sessions. Falling odds of rate cuts next year are a prime factor in the Treasury market's recent woes, with the CME FedWatch tool now placing chances of a January rate pause at above 90% and baking in just two rate cuts next year, down from four a few months ago.

There's even some talk that the Fed might have to raise rates again. But for now, that hasn't gone beyond chatter, as futures trading shows no one making bets on a rate hike next year. The Fed seems to be on pause for now, with 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.

The idea of rates staying at current levels above 4% puts pressure on smaller companies that rely more on borrowing. At the same time, it may help the mega-cap companies that many investors perceive as safe ports in a storm, though no stock is truly safe. As of yesterday, the 10 largest stocks in the S&P 500 represented nearly 40% of the index's market cap.

With yields climbing, it wasn't much of a surprise to see cyclical and defensive sectors like materials, industrials, and consumer staples bring up the rear yesterday. Even as communications services and infotech, two sectors dominated by mega caps, climbed.

The S&P 500 Equal Weight Index, which weighs all stocks the same instead of by market capitalization, trailed the S&P 500 Index as behemoths like Nvidia and Broadcom rallied. Small caps fell once again, still feeling the interest rate headwind. The small cap Russell 2000 Index is having its worst year relative to the S&P 500 since 1998.

In data yesterday, U.S. durable goods orders fell 1.1% in November, worse than the trading economics consensus of 0.4%, and turning around after a 0.8% rise in October. Transportation equipment led the decline. But orders for non-defense capital goods, excluding aircraft, a barometer for the broader economy, rose 0.7%, the biggest increase since August of 2023.

Additionally, yesterday's December consumer confidence reading from the conference board unexpectedly declined to a headline of 104.7 compared with consensus for 113.5. This was a five-month low, and people surveyed sounded anxious about proposed tariffs and politics in general.

Most surveyed expected tariffs to raise prices and annual 12-month inflation expectations rose to 5% from the previous 4.9%. Expectations for business conditions ahead also backtracked. The expectations component fell by 12.6 points in December, the largest drop since November of 2020, said Kevin Gordon, director and senior investment strategist at Schwab.

One other report, November new home sales, also came out yesterday and showed a 5.9% rise to an annualized rate of $664,000, above expectations of $650,000. There's no fresh U.S. data expected today.

The S&P 500 index added 43.22 points or 0.73% Monday to 5,974.07. The Dow Jones Industrial Average climbed 66.69 points or 0.16% to 42,906.95. And the Nasdaq Composite rose 192.29 points or 0.98% to 19,764.88.

This has been the Schwab Market Update podcast. To stay informed, visit www.schwab.com slash market update or follow us for free in your favorite podcasting app. And if you like what you've heard, please consider leaving us a rating or a review. It really helps new listeners find the show. Join us for another update tomorrow. For important disclosures, see the show notes and schwab.com slash market update podcast.