Hi, everyone. Welcome to the December Market Snapshot. My name is Kevin Gordon, standing in for Liz Ann this time, but don’t worry, she’ll be back next month to cover the next month’s Market Snapshot. But in the meantime, I want to walk you through some of the charts and the visuals that we have in our 2025 Outlook, which we just published recently.
[Cartoon for We’re certain we have no idea what’s ahead is displayed]
So I just want to dive right in with the first image, which is always one that we love to cover because it comes from our fabulous in-house cartoonist, Carlos Gary. You could see here it’s two individuals looking at a bunch of signs. And if you’re familiar with any city street parking in any city across the country, probably this looks familiar to you. But this is really to sort of visualize and give more information on all of the uncertainties that are sort of facing us, not just in 2025, but maybe beyond. And maybe no surprise, a lot of this is tied to the results around the election for President-Elect Trump, former President Trump, soon to become again President Trump, whether it’s, you know, be it immigration policy or anything tariff-related or anything deficit- or regulation-related. All of this kind of lives in the what we don’t know column coming up for 2025.
[High/low chart for Tariffs give an immediate boost to goods inflation… for PCE Price Index is displayed]
And if I was to sort of start on one, and one that we really took a lot of time to start to dissect in our Outlook Report, it’s everything around tariffs. And if you look at the specifics around inflation, in particular, for the potential that, you know, tariffs have in terms of their hit to the economy, what’s really important when we kind of go back to dusting off the playbook from the first time that we had this under the first Trump administration, you could see here from the PCE Price Index. This is the one that the Fed prefers to look at. What we did here was look specifically at the nine tariff impacted categories that were under sort of the tariffs initially from the trade war that was initiated with China under the first Trump administration. So we put that vertical line there where you could see the start of it. And you could see almost an immediate impact where, yes, you had some upward momentum heading into it, but after that you started to see a pretty meaningful increase in those nine impacted areas.
[High/low chart for PCE Core Goods Price Index is displayed]
And that’s important because if you were to look at broader core goods inflation within the PCE Index, you did actually continue to see a bit of a downtrend. So there was a clear split between what was impacted versus what wasn’t. And I think a major takeaway from this is that if you do get more targeted tariffs sometime in 2025, or even carrying into 2026, whether it’s with China, whether it’s with our other trading partners, if they’re a bit more targeted in nature, there may not be as much of a hit to broader inflation.
However, the one thing I want to emphasize, and that we did emphasize in the Outlook, is that you probably don’t have as much room in terms of leeway for headline inflation this time around as Trump did in the first term, where, you know, core inflation right now is running at a much hotter rate than it was before. So if you were to get a little bit more acceleration, particularly in the goods category, which has been in deflation for a good chunk of the past year, but is now seemingly exiting deflation territory, you probably don’t get as much help for overall aggregate inflation.
[High/low chart for …and a hit to manufacturing activity for ISM Manufacturing Index is displayed]
Similar hit that we would maybe expect on the manufacturing side of things, where if you look at something like the Manufacturing PMI that comes from the Institute for Supply Management, this is really a gauge of manufacturing activity, where if you’re above 50, you’re an expansion, if you’re below 50, you’re in contraction. And again, we put a dotted line where you started to see the start of the US-China trade war in 2018. And again, similar with inflation, you could start to see the immediate impact. So there was an immediate rolling over in manufacturing activity, eventually falling into contraction territory by the time you got into 2019.
[High/low chart for ISM Services Index is displayed]
If you overlay services with that in the same index that comes out from ISM, but just measures everything that’s not in the manufacturing side of the economy, services actually stayed relatively resilient. And in fact, you had a better pickup going into 2020. And of course that was cut short because of the pandemic. So we can’t attribute any of that to the trade war. But this time there’s a bit of a convergence happening. And if you look at the far end of this chart, services is catching down just a little bit while manufacturing is starting to catch up.
So one risk we see is that if there was another trade war initiated, whether it’s with China or with our other trading partners, there might be maybe not as much of a hit to manufacturing, but maybe more of this sort of stalled-out recovery that we’ve seen, you know, for the sector that’s been kind of mired in the sideways move over the past couple of years.
[High/low chart for Restricting labor force growth poses GDP risk for 5-year % change in Real GDP and U.S. employment in labor force is displayed]
Transitioning a little bit to, you know, everything immigration-, policy-, and labor-market related, this is one of the bigger unknowns for us, and really for, you know, the broader investment community as we head into 2025. And we would argue that this is really not as much a 2025 issue itself. It’s probably something that goes beyond 2025, especially when you start to think about any logistical nightmare associated with trying to either, number one, deport as many people as the Trump campaign has proposed, or number two, just curbing immigration in general. And the one thing that we’re keeping an eye on is if labor force growth starts to slow meaningfully because of these curbs on immigration or because of removal of the labor force. So you could see here a pretty strong and tight relationship between growth in labor, but also growth in GDP. So this is one that we don’t have as much information on, and it’s probably one that warrants a little bit less time spent on it because we simply don’t have any firm statistics or projections as to how much labor force growth is actually going to contract.
[High/low chart for “Don’t Fight the Tape” for S&P 500, 50-day and 200-day moving average is displayed]
If we move over to the market side of things, you know, one of the things in the columns of what we do know versus what we don’t know is we know that momentum is pretty strong and pretty healthy heading into 2025. So this chart is just showing the S&P 500 with its 50-day and 200-day moving averages, and you could see that we’re in a pretty firm uptrend. The market is above its 50-day and 200-day moving average. The market’s 50-day moving average is above its 200-day moving average.
[Table for S&P 500 annualized gain is displayed]
And you can see from the table that we’ve embedded in here, it’s a pretty simple look. You know, going back to the 1920s, just looking at when you do have the 50-day above the 200-day, you have an annualized gain of about just slightly more than 9%. When you don’t, it’s just basically flat. So as long as this trend continues and you continue to see upward momentum, not just for a small group of stocks, but for the broader market, which has mostly been the case in the back half of this year, then we think that’s a pretty good setup going into 2025.
[High/low chart for Valuation reaching euphoric territory for S&P 500 5-year normalized P/E and Bear market bottom dates is displayed]
In terms of some of the risks that we see, valuation and sentiment, and investor sentiment, is probably the biggest one right now. And if we start with valuation first, we actually think of valuation as a sentiment indicator, or an indicator of sentiment. And it gives you a sense of really what investors are willing to pay for stocks. And if you look here at this chart, you know, the five-year normalized PE, which we love because it takes sort of this blend between trailing earnings, but also estimated earnings, and it goes back to the 1940s, so it’s got a really long history. You’re really bumping up against 2021 and the late 1990s in terms of prior periods when valuation was really stretched. So it just means that investors are willing to pay a lot right now for stocks, but it’s also consistent with what we’ve started to see, which is a lot more exposure to the equity market from a household perspective.
[High/low chart for Stock exposure consistent with tepid stock gains for Household stock allocation and Subsequent S&P 500 rolling 10-year returns is displayed]
So this final chart that we’re showing is just looking in blue at the household stock allocation. And again, similar to the valuation chart I just showed, we were only bumping up against levels that we had seen in 2021 and the late 1990s. And what’s interesting about this is if you look at the yellow line that’s overlaid here, this is the subsequent rolling 10-year return for the S&P 500. So it’s basically saying that when you get to household stock allocations that are this stretched, and when households are this exposed to equities, historically that’s preceded sort of a weaker run for stocks in the subsequent 10 years. It isn’t always the case, no relationship is perfect, but we would just note that as a risk in terms of overall exposure that households have.
[List of Takeaways is displayed]
So taking this to the takeaway section, you know, from a tariff policy and an immigration policy perspective, we do view those as potentially giving a little bit of a boost to inflation or a lot of a boost to inflation, depending on how aggressive those policies end up being. But of course, we need to see what the actual policies are going to be and what the meat on the bones is, but also maybe potentially hits to growth. And I think that’s probably where we need to spend more time thinking about what the potential is for the hit to GDP in the US if you do get a pretty significant reduction in the labor force, whether it’s via deportations or if it’s just a stricter curve on immigration into the country.
From a stock market perspective, you know, much like we see for the economy right now, there is pretty solid momentum heading into 2025, where you’ve got, you know, a pretty good chunk of companies in the S&P trading above their 200-day moving average. You’ve got the market’s 50-day moving average above its 200-day moving average. So momentum bodes pretty well. But we want to be realistic and careful to note what some of the risks are heading into next year, and frothy sediment is definitely one that comes to the front burner for us.
So those are some of the takeaways from our Outlook for 2025. Of course, you can always go to schwab.com/learn and read more of the Outlook and see a lot more charts that we included.
But that wraps it for this December Market Snapshot, and Liz Ann will see you next time.
[Disclosures and Definitions are displayed]
