Markets Brief: Consumer Stocks Rally, Some Now Look Pricey

Insights into key market performance and economic trends from Dan Kemp, Morningstar’s global chief research and investment officer.

Large-Cap Stocks Still On Top

Investors finished November in an upbeat mood, with US equities rising 1% over the holiday-shortened trading week and 6.5% over the month. Smaller companies rose 9.1% over the month but continue to lag large companies over 2024, with a gain of 20.1% compared with 29.8% for large-cap stocks.

Although relative performance does not always indicate relative value, smaller companies (especially those in traditional industries) continue to be priced more attractively than their larger peers, providing opportunities for patient investors who dig a little deeper. Fund manager Charlie Dreifus recently discussed how smaller companies have underperformed on Morningstar’s podcast The Long View.

Tesla Stock Accelerates

Fittingly for the month containing Black Friday, consumer cyclicals were the top-performing sector, rising 12.6%. Although Tesla TSLA accounted for over a third of this, as its stock rose 33%, index heavyweights Amazon AMZN (which gained 8.9%) and Home Depot HD (8.6%) also contributed. While each name now appears expensive, Morningstar analyst Jaime Katz believes the DIY store’s valuation looks especially high.

Tariffs Weigh on Emerging Markets

Developed markets outside the United States were flat over the month, while emerging markets fell 4.4%, driven by declines in China, Taiwan, and Korea, which compose 52.8% of the index. While it’s easy to attribute these falls to concerns about potential tariffs under Donald Trump’s incoming presidential administration, separating changes in a firm’s true value from changes in investor sentiment is important.

Tariffs would indeed likely impact the real value of these companies, but negative sentiment appears to be the dominant driver of these declines. This provides opportunities for patient investors who can look beyond current political concerns. Morningstar Americas CIO Philip Straehl and European equity strategist Michael Field explain why we favor these markets and others outside the US.

Treasury Yields Soften, High-Yield Bonds Outperform

The holiday mood was also supported by inflation and economic growth data that met expectations and a sharp fall in Treasury bond yields which saw the 10-year yield decline to 4.2%. Although the yield remains above the trough of 3.6% it reached in September, it is well below the high of 4.5% seen earlier this month.

Among lower-quality bonds, credit spreads—the additional yield an investor receives for accepting the risk of default—remain unusually low. High-yield bonds offer yields 2.7% higher than the equivalent Treasury bond. Compared with Morningstar’s expectation of annualized credit losses for these bonds of 2.4%, it seems likely that investors will lose most of that higher income in longer-term capital losses. Funds with higher exposure to lower-quality bonds have likely performed better this year. The Morningstar High Yield Bond Index has returned 8.7% in 2024, while Treasury bonds have delivered only 2.3%.

Non-Farm Payrolls Due

Employment data released Friday will likely be the big news this week, as it could challenge the dominant narrative of a soft landing for the US economy. Ahead of that release, the Federal Reserve will release its “Beige Book” of anecdotal evidence about the country’s economic conditions.

You can find our full calendar of the week’s events here.

Highlights of this Week’s Market and Investing Events

• Monday, Dec. 2: October Construction Spending, November ISM Manufacturing, earnings from Zscaler ZS
• Tuesday, Dec. 3: October Job Openings and Labor Turnover Survey, earnings from Salesforce CRM
• Wednesday, Dec. 4: November ADP Employment Survey, November ISM Services PMI, Federal Reserve Beige Book
• Thursday, Dec. 5: earnings from Lululemon Athletica LULU
• Friday, Dec. 6: November Employment Situation Report, October Consumer Credit, December Preliminary University of Michigan Index of Consumer Sentiment