The November surge to new highs for the S&P 500 (SPY) has resulted in a December consolidation and rotation period.

That is where the overall market trades in a narrow range making it seem like the seas are calm. But below the surface is violent sector rotation leading to very volatile price action.

This phase is common place during a bull market where it is best to keep your eyes on the steady long term horizon to prevent nausea from all the near term turbulence.

This gives us a good opportunity to check in on the general health of the economy, inflation and what that means for the Fed’s next meeting on December 18^th. That will be our focus today.

Market Outlook

It’s easy to get lost in the forest of all the individual economic reports. That is why we will start with an examination of the most important tree in that forest…that being the state of GDP.

The GDPNow model from the Atlanta currently estimates +3.3% growth in Q4 with about 65% of the inputs in place. Now compare this with the lower, yet still ample +2.1% reading from the Bluechip Panel of Economists.

Typically results seem to end up closer to the reading of GDPNow because it updates several times a month. This means that overall the economy is on strong footing with little reason to believe a recession is on the horizon. That makes it very easy for stocks to surge to new highs as they have of late.

Now let’s dig in with the most recent key reports to see if they give us any clues as to what the Fed will do at their next rate decision meeting on 12/18.

12/2 ISM Manufacturing: Great improvement month over month from 46.5 to 48.4 and New Orders up over 50. Yes, this sounds kind of weak because under 50 points to contraction. But these readings are amongst the highest in 2 years and directionally shows improvement.

12/4 ISM Services: Here we have the flip side of the manufacturing report as the 52.1 reading is much lower than the previous month’s 56.0. However, it is still in expansion territory with the forward looking New Orders component pointing to better results ahead at 53.7. Overall Services is the main engine pulling the US economy forward.

12/6 Govt Employment Situation & Avg Hourly Earnings: The 227K jobs added was a healthy showing after the surprisingly weak 36K the previous month. The assumption is that many employers held off on hiring til after the election.

The bigger problem I see here is that wage inflation remains stuck at 4% year over year which is pretty much the same level since March 2024. No doubt Fed officials are not happy with this “stickiness” as the want to be on course for 2% inflation.

12/11 CPI & 12/12: The CPI needle seems stuck at too high of a level at 2.7% overall and an even worse 3.3% year over year change for the Core reading. This has not really budged lower since June.

The PPI report was no better on Thursday morning with the Core reading rising from 3.2% to 3.4%. And really has been climbing all year long. Please remember that PPI is often considered the leading indicator of what is in CPI and PCE a few months down the road. Just no way to see this PPI report in a positive light leading into the next item…

12/18 Fed Rate Decision Meeting: Right now investors see a 98% likelihood of another 25 basis point cut at the 12/18 Fed meeting. That is a perplexing assumption given what I wrote above about sticky wage inflation and how CPI and PPI are stuck at too high of a level.

If the Fed is “data dependent” then I don’t see any data point logically saying they should cut again on 12/18 EXCEPT if they want to keep the market happy (which is not their job).

The market is mostly filled with active traders who are degenerate gamblers drinking Red Bull and putting illegal stuff up their nose to keep the adrenaline flowing. These petulant children should not be directing the adults (aka Fed) on what to do…it should very much be the other way around.

I am not saying the Fed definitely will not lower rates at this December meeting. I simply wouldn’t be surprised if they serve investors a wakeup call with no change.

That may lead to a pouty reaction with a minor 2-3% stock pullback. That is a pretty typical reflexive reaction for stocks given the ample gains so far this year.

I don’t see this as a reason to get conservative or short the market. I would just use any possible dip as another buying opportunity to load up on the best stocks for 2025.

I believe that winning formula is Risk On with a focus on small and mid cap stocks with healthy growth prospects while also trading at reasonable valuations. That is exactly what the POWR Ratings model serves up on a daily basis.

My favorite of those POWR Ratings stocks are shared in the section below…

What To Do Next?

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Steve Reitmeister…but everyone calls me Reity (pronounced “Righty”)
CEO, StockNews.com and Editor, Reitmeister Total Return

SPY shares rose $0.10 (+0.02%) in after-hours trading Thursday. Year-to-date, SPY has gained 28.34%, versus a % rise in the benchmark S&P 500 index during the same period.

About the Author: Steve Reitmeister

Steve is better known to the StockNews audience as “Reity”. Not only is he the CEO of the firm, but he also shares his 40 years of investment experience in the Reitmeister Total Return portfolio. Learn more about Reity’s background, along with links to his most recent articles and stock picks. More...

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