PNC Capital Directions Portfolio and Performance Review

• Federal Reserve Cuts Rates but Strikes Less Dovish Tone: On December 18^th, the Federal Reserve (Fed) cut the federal funds rate by 25 basis points (bps), as markets expected. However, with inflation slightly higher than previous guidance and strong economic growth persisting, the Fed signaled that there may be fewer rate cuts in 2025 versus its last projection – and, perhaps, less than many investors had anticipated. The rough consensus amongst the Fed’s participants was that there could be a total of just 50 bps in rate cuts next year.
• The Grinch Market: Markets seemed unprepared for the latest outlook from the central bank regarding future rate cuts. The S&P 500 finished 2.95% lower on December 18^th while the Russell 2000, a barometer for smaller companies, fell 4.42%. Additionally, the CBOE Volatility Index, a measure of market volatility, saw its second largest percentage jump in history, rising 74% for the day. Furthermore, the typical uptrend known as “the Santa Claus rally” from Christmas Eve through New Year’s didn’t materialize. The indexes wrapped up the holiday period down 1.52% and 0.26%, respectively.
• Home Sales Increase: Existing home sales rose in November (released December 19^th), marking the second month in a row for an increase. Sales were also higher on a year-over-year basis, the first annual improvement from a November reading since 2020. Still, the absolute level of existing home sales remains near 15-year lows, driven largely by high interest rates. As of November 27^th, the 30-year fixed mortgage rate, reported weekly by Freddie Mac, sat just below 7%, about one percentage point less than the two-decade high reached in October 2023 but still more than double the rate from November 2020.
• Inflation Remains Stubborn: The “core” Personal Consumption Expenditures (PCE) index, the Federal Reserve’s preferred gauge of inflation, increased 0.1% in November and 2.8% over the past year. This marked a slightly lower increase than was forecast, but it showed that inflation remains stubbornly above the Fed’s target.
• Initial Jobless Claims Fall: Initial jobless claims fell noticeably to close out December. After reaching 242,000 for the week ending December 7^th, the figure dropped to 211,000 for the week ending December 28^th, which marked an 8-month low for the data series. The reading reaffirms the continued strength of the U.S. labor market, which may be a sign to the Federal Reserve that it can hold off on further rate cuts in the fight against inflation.

• U.S. Large Cap Growth equities showed relative strength versus other assets, albeit the S&P 500 Growth Index returned just 0.85% for the month
• International Emerging Markets equities also performed well compared with other segments, despite the MSCI Emerging Markets Index falling 0.14%
• High Yield Bonds were down less than other investments, too, with the Bloomberg US Corporate High Yield Index generating a 0.43% loss

• U.S. Small Cap Value stocks reversed some recent outperformance, as the Russell 2000 Value Index sold off 8.33% over the period
• U.S. Small Cap Growth stocks, like their value style counterparts, gave up ground, with the Russell 2000 Growth Index down 8.19%
• U.S. Mid Cap Growth equities rounded out a size-based theme for our detractors, as the S&P MidCap 400 Growth Index lost 6.67%

During the month of December, there were no asset allocation changes for most portfolios in the program. There were slight changes to multi-asset income focused models. In these models, we eliminated a target allocation to Preferred Stocks, an asset class which had appreciated in price but which was now generating lower yields. We also sought to increase yield by raising allocations in lower credit quality fixed income as well as alternative funds that use call-writing to generate additional income.

Within stocks, we continue to prefer a tactical overweight to U.S. markets versus non-U.S. developed markets for most portfolios, based on what we believe to be the relatively stronger position of the U.S. economy. As part of U.S. allocations, we still favor a tilt to higher-quality, dividend-paying growth stocks as well as lower volatility stocks, for their potential to mitigate some downside.

In fixed income, we continue to prefer an intermediate duration (i.e., interest rate sensitivity) allocated to mostly higher quality, investment-grade bonds, as we expect slower economic growth over the near term. While some portfolios have positions in below-investment grade bonds, we have tactically underweighted this area (excluding some income-oriented portfolios).

We continue to diligently monitor the markets and your account, and we will keep you abreast of any changes to your portfolio allocation and investment selection that we deem appropriate so that you’re well positioned for what’s ahead.