Smattering of Data Ahead in Holiday-Shortened Week
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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 market for Monday, December 30th.

Another holiday-shortened week looms, but investors can look forward to a couple of developments besides their New Year's Eve plans. For instance, Friday features the December ISM Manufacturing Index, providing insight on what's been a sluggish U.S. manufacturing sector. And at some point this week, Tesla is expected to release its quarterly vehicle delivery results.

First off, investors can pour over the latest housing market data later this morning when November pending home sales come out at 10 a.m. Eastern time. Analysts expect a 0.7% monthly increase for this leading indicator of housing market activity, down from 2% the prior month. Mortgage rates rose in November, perhaps sapping demand.

There's more data due after the close from China. The official NBS manufacturing PMI is due this evening, U.S. time, and analysts expect a reading of 50.3 according to Trading Economics. That would put the index above the 50 level that represents expansion. This also follows the 50.1 November reading that was the highest since April. Output and new orders both grew in November, so investors might want to watch those figures in December to see if a trend is underway.

China's economy has languished since the end of the pandemic, but the government recently announced some stimulus measures. MegaCap U.S. stocks were also in focus this week after a mixed Yuletide performance. These stocks, especially the so-called Magnificent Seven, often set the tone on Wall Street and are up significantly this year.

However, market breadth improved in October and November as non-tech stocks gained. That was a healthy sign of broader participation from other sectors, but it died down after this month's cautious Federal Reserve outlook on 2025 rates.

Those hoping for another year of Wall Street vigor might also want to see breadth expand by putting the entire rally on the shoulders of mega caps. That's especially true in 2025 when the Magnificent Seven face tough earnings growth comparisons after some recorded massive profit gains the last few years. Tesla is a member of that exclusive club and is expected to report December vehicle deliveries of 510,000, analysts say.

On Wednesday, U.S. markets are closed for the New Year holiday. Volume might be light heading into the holiday and shortly afterward, which can sometimes exacerbate moves. Anyone trading actively this week may want to consider smaller-sized trades. Also, with so many investors away, many major moves up or down this week will likely be looked at skeptically, with doubts about the level of conviction behind them.

Friday's stock market action was lower almost across the board with the deepest losses in mega caps and the tech sector in general. Volume was light, which may have exacerbated a downward move that partly reflected late-year profit-taking and tax-loss harvesting. Tax-loss harvesting is when investors sell both winning and losing shares to lighten their capital gains tax burden late in the year.

Major indexes managed to finish off their intraday lows, and technical support appeared to hold. Volatility spiked Friday as well by nearly 9%, and the SIBO volatility index futures complex is in contango, meaning contracts further out are slightly higher than the spot level. This could indicate worries about possible accelerated profit-taking in January, though that's not guaranteed.

If profit-taking does spike in early 2025, it could reflect some investors waiting to sell in the new year, hoping for friendlier tax policies under the Trump administration. Proposed tariff and immigration policy changes supported by Trump could be lifting Treasury yields and weighing on stocks. The 10-year Treasury note yield climbed above 4.6% again Friday to just a few basis points below the 2024 high of 4.73%.

Higher borrowing costs can slow economic growth, reduce the chance of mergers and acquisitions, hurt the housing market, and weigh on company profit margins. In addition, higher yields often pull investor funds away from stocks and into what some perceive as less risky fixed income investments, though no investment is without risk.

Any additional gains towards 4.75% this week could keep pressure on stocks. Also, with volume expected to be low again, sharp losses like Friday's can't be ruled out. Every S&P sector fell during last week's final trading session, but communication services, infotech, and consumer discretionary, the three leading sectors when the market rallied Tuesday, finished in the bottom three positions Friday.

Technically, the 50-day moving average for the S&P 500 just below 59.40 appeared to hold as support on an early test during Friday's sell-off, with buyers showing up at that level. It happens to be the same spot where the market stabilized after the Fed-related sell-off two weeks ago. On any drops below that level, further support might be near the closing lows following the last Fed meeting near 58.70.

Checking rates, the CME FedWatch tool now puts odds of a January Fed pause close to 90% and dials in just two rate cuts in 2025, down from four not long ago. The tool pegs chances for at least one rate cut in the first quarter at around 50-50. The S&P 500 is on track to finish December with slight losses unless it can claw back above 6,032 by the end of the day Tuesday.

A December drop would mean the S&P 500 is down two of the last three months, something investors haven't seen since a three-month backtrack from August through October of 2022. Despite this, the S&P 500 remains only about 2% below all-time highs recorded earlier this month.

The S&P 500 dropped 66.74 points or 1.11% Friday to 5,970.84, up 0.67% for the week. The Dow Jones Industrial Average fell 339.59 points or 0.77% to 42,992.21, up 0.35% for the week.

And the Nasdaq Composite shed 298.33 points, or 1.49%, to 19,722.03, up 0.76% for the week. The benchmark 10-year Treasury yield climbed nearly five basis points to just under 4.63%, near its peak for the week. This has been the Schwab Market Update Podcast.

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