Zacks
4 Best-Performing ETF Areas of Q4 That Still Show Promise
Sanghamitra Saha
5 min read

In This Article:

Wall Street has been upbeat in the ongoing fourth quarter, with the S&P 500 gaining about 5.4%, the Dow Jones adding 2.6% and the Nasdaq composite surging about 10.8% over the past three months (as of Dec. 24, 2024). The small-cap index Russell 2000, however, has advanced a moderate 1.6%.

The quarterly rally was more pronounced in November courtesy of optimism over potential tax cuts and a post-Presidential election rally triggered by Donald Trump’s victory. The Fed has enacted two rate cuts in the fourth quarter, one in November and the other this month (read: November Turns S&P 500's Best Month in 2024: ETF Area Winners).

Strong GDP Growth & Retail Sales

On the economic front, the U.S. economy has been in great shape. The economy expanded at an annual rate of 3.1% from July through September, driven by strong consumer spending and increased exports. The above-consensus retail sales growth in November further demonstrated economic resilience (read: Will Santa Claus Rally Set In for 2024? 4 Best ETF Areas to Explore).

Cooling Inflation

The annual inflation rate in the United States rose for a second successive month to 2.7% in November 2024 from 2.6% in October, in line with expectations. However, the rise was partly influenced by low base effects from last year, which indicates a tough comparison.

Otherwise, the PCE price index, the Fed’s preferred inflation gauge, showed an increase of just 0.1% from October and a 2.4% annual growth rate, both below expectations. This cooling inflation is a tailwind to keep consumer spending at a strong level.

December Emerging as a Milder Month

Despite the strength in November, December so far has emerged as a milder month for equities due to hawkish Fed cues for 2025 and an easing Trump bump. In the past month, the S&P 500 is off 0.2%, the Dow Jones has retreated 0.4% and the Nasdaq Composite has fallen 0.4%.

The downturn in the equity market from early December's highs stemmed from a cautious outlook by the Fed. The Fed now projects just two rate cuts in 2025, down from the earlier expectations of four, reinforcing a “higher for longer” policy approach that could weigh on the year’s final trading days (read: 4 Low P/E Momentum ETFs for an Uncertain Santa Rally).

Rise in Bond Yields in Q4

U.S. benchmark treasury yield was 4.59% on Dec. 24, considerably higher than 3.74% recorded at the start of the fourth quarter. This surge in bond yields has every reason to weigh on equities. A risk-on sentiment, a stronger greenback and hawkish Fed cues led to this rise in yields.

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