Small-Caps and Treasuries Lag as Gold Shines

A Look at Market Performance Amidst Anticipated Rate Cuts

Last week marked a continuation of the trend we’ve seen recently, which has featured renewed leadership from large-caps, growth and high beta stocks. In many ways, the market looks very much like it did in 2023 and the first half of 2024 where just a handful of mega-caps led the way and left everything else behind. Small-caps, utilities and long-term Treasuries all underperformed badly, but gold managed to once again post a solid gain. With a rate cut likely locked in for next week and no major surprises on the data front, a sense of seasonality might be creeping in here. Volatility has been dropping and investors may be looking ahead to 2025. Those conditions could be favorable for risk assets over the next few weeks, but complacency could become a risk as well.

The November inflation numbers in the U.S. came in as expected, which is to say that inflation remains sticky at best and rising at worst. The bigger concern came on the producer side where annualized PPI rose to 3% for the first time since February 2023, while core PPI remained at its highest level over the same time frame. That means there’s probably further inflationary pressures ahead that will limit what the Fed will be able to do in 2025. This coming week, we’ll get the PCE inflation number, which is expected to hit a 6-month high. The market has correctly dialed down its expectations for Fed rate cuts in 2025 and that could pressure Treasury yields to remain higher for longer. Even without the impact of potential Trump tariffs, inflation is definitely back on the rise and it’s likely going to become a global phenomenon.