Nostalgia may be evident in gift buying this holiday season, though previous market winners from the first half of this year have not been the winners of the second half. A period of digestion and rotation has been taking place since Fed rate cuts and following the election. Investment banks and industrials have performed well this month while technology and tariff-sensitive firms have underperformed. The October CPI inflation report was in line with expectations and this has improved odds for a 25 basis point cut in interest rates by the Federal Reserve in December. However, we will have one more CPI print ahead of the December FOMC decision yet to digest.
Corporate dealmaking is expected to pick up
Citigroup’s Chief Executive Jane Fraser said Tuesday that she is seeing “the big unlock” on the horizon in mergers and acquisitions, which has faced headwinds from higher interest rates, political uncertainty and antitrust activity by the Federal Trade Commission. Worldwide deal-making reached an all-time high of 58,308 transactions in 2021 but is expected to drop 40% from that peak year to an estimated 35,157 transactions in 2024. Total worldwide dollar volume has fallen even more substantially to an estimated $2.66 trillion in 2024 from the peak of $5.24 trillion in 2021, down about 49%. Although 2024 is showing some improvement from the $2.5 trillion last year, this year will also be lower than the $3.38 trillion posted in 2022. Citibank, along with other firms recently, is now seeing an increase in interest from clients to pursue capital-raising and mergers, as well as initial public offerings. This should benefit investment banks as well as potentially a number of industries looking to consolidate.
Inflation is still sticky
The October US consumer price index report released Wednesday showed that overall inflation was up 0.2% for the fourth straight month, while the core rate (excluding food and energy) rose 0.3% for a third consecutive month. As has been the case for some time, housing drove most of the core CPI increase. The 12-month gains matched expectations, with the headline CPI accelerating to 2.6% from 2.4% and the core rate stuck at 3.3% year over year. The annual core CPI rate has been sticky since July, and has averaged 3.5% so far in 2024. Falling energy prices helped somewhat, though the core CPI was further led higher by used cars and trucks, airfares, medical care and recreation. Used vehicles also jumped, though partly related to hurricane impact. The indexes for apparel, communication, and household furnishings and operations were among those that decreased over the month.
Mortgage rates still backing up
Mortgage rates continued to climb last week as investors considered the future of the economy under a Trump presidency. Total application volume was essentially flat, rising just 0.5% last week compared with the previous week, according to the Mortgage Bankers Association. This marked the first rise in overall demand in seven weeks. Applications to refinance a home loan, which are most sensitive to weekly moves in rates, fell 2% for the week to the lowest level since May. Refinancings were 43% higher than the same week one year ago. Last year at that time, mortgage rates were 75 basis points higher. Applications for a mortgage to purchase a home rose 2% for the week and were 1% higher than the same week one year ago.
The average interest rate for 30-year fixed-rate mortgages increased to 6.86% from 6.81%. Mortgage rates continued to increase driven by higher Treasury yields as financial markets digested the likely impacts of a Trump presidency, despite the Fed’s 25-basis-point rate cut that was widely anticipated. Homebuyers may be looking at lower rates than last year, but they are also seeing higher home prices. Meanwhile, the supply of homes for sale still remains relatively lean.
Hurricane demand helped Home Depot
Staying on the housing front, Home Depot# posted better-than-expected third-quarter revenue, which grew 6.6% to $40.2 billion, benefiting from $200 million of hurricane-related sales. An acquisition also added about $2.9 billion in sales. Transaction and average ticket growth were negative, though both improved sequentially. While there is continued macro uncertainty, the company saw better engagement across seasonal goods and certain outdoor projects. The company raised FY24 revenue growth guidance to +4% from prior +2.5-3.5%, while it is looking for earnings to decline 1% over the prior year. Despite the cyclical rotations following the election, home improvement retailers and homebuilder stocks have lagged the broader market. Interest rates are still higher than optimal and macroeconomic uncertainty has continued to stall major renovation projects with DIY customers.
Six of the 13 House races yet to be called are in California, and the margin in several districts is fewer than 5,000 votes. An estimated 2.6 million ballots are yet to be processed, although major news outlets are now calling the House to maintain its Republican majority. South Dakota Senator John Thune, a longtime deputy of Mitch McConnell and an advocate of free trade, won election to lead the Republican Senate majority next year. This sets up potential conflicts with President-elect Trump over tariffs and Ukraine aid. Markets generally prefer a divided government, so a few internal checks and balances may be welcome after a Republican sweep of all three branches of government now looks likely.
Eagles wide receiver DeVonta Smith turns 26, actor Patrick Warburton (aka David Puddy) turns 60, and King Charles III is crowned 76 today.
Christopher Crooks, CFA®, CFP® 610-260-2219