Despite the underwhelming 2024 finish and a premature pause of the anticipated Santa rally driven by hedge fund shorting, pension fund year end rebalancing and derisking by volatility control funds and retail participants, S&P 500 posted its second consecutive year of 20%+ returns, the best two-year streak since 1998.The past year saw wide disparities in both the US and Europe regions with growth stocks and cyclicals outperforming value and defensives respectively. Communication services and InfoTech stocks were the top performers in the US posting returns of 40% and 37%, respectively with Materials the worst, posting small negative returns, while in Europe Banks were the top performing sector posting 26% return and Autos the worst posting 12% loss for the year.
Moving into 2025, January has historically been a strong indicator for performance for the rest of the year, where c.70% of the time since 1929, the year closed in positive territory following a positive return for January. Markets have sold off since mid-December, with both the Nasdaq and SOX index starting off this week with a rebound off support levels as the markets shrugs off headlines on Trump tariffs. Despite the rebound, technical indicators no longer reflect the overbought conditions, with the percentage of SP500 members above RSI 70, and above their MA20 at range lows pointing to a upside in the short term. Similarly, retail equity flows and sentiment indicators also point to a tactical rebound ahead. In terms of liquidity, the seasonal spike in RRP balances and drop in US Reserve balances with the FED, which negatively affect equity returns appear to be overdone, while the DXY is also stalling at resistance levels, following the recent spike on the back of the hawkish December FED meeting.
For the first full week of the year, the markets main focus will be on the US December Jobs report on Friday, where consensus expects nonfarm payrolls to grow by 163k above the 6-month average of +143k but bellow the +227k November print. The tone set by Powell at the December meeting that more work may need to be done on inflation paired with a more data dependent response ahead, forced the market to scale back rate cut expectations down to only two for 2025 and a 91.4% probability of a no cut in January. Hence the upcoming NFP report is of greater relevance as investors will want to see confirmation that labour trends remain strong in a scenario where rates remain elevated due to stickier inflation.
In Europe, the main focus will be the Euro flash CPI for December, which is out today, and expected to rise to 2.4% from 2.2% (Core- unchanged at 2.7% YoY). Following the recent rise in natural gas prices and a depreciating Euro, both headline and core inflation in the EU are expected to remain above the ECB’s target of 2%, which has pushed the 10yr Bund yield to 2.45% from 2% at the beginning of December.
We reiterate our DAX put spreads proposed in our note EQD 2025 Outlook - Higher volatility ahead.