Market Commentary | March 31st, 2025

Market Commentary | March 31st, 2025

by | Mar 31, 2025 | Market Commentary

Weekly Market Commentary

March 31st, 2025

Week in Review…

Market indices closed the week lower as markets grappled with weakening consumer confidence and April 2 tariffs on automotives.

 

  • The S&P 500 declined by -1.53%
  • The Dow Jones Industrial Average declined by –0.96%
  • The tech-heavy Nasdaq performed worst, falling –2.59%
  • The 10-Year Treasury yield closed at 4.25%

Last week’s economic reports painted a complex picture, with persistent inflation concerns taking center stage. Specifically, core personal consumption expenditures (PCE), the Federal Reserve’s (Fed) favored inflation gauge, exceeded expectations at 0.4% month-over-month (versus 0.3%), signaling stubborn price pressures above the 2% target. Crucially, unlike the fixed-weight consumer price index (CPI), PCE adjusts for consumer behavior, making it a key Fed indicator. Further reinforcing inflation concerns, the University of Michigan revised its 1- and 3-year inflation expectations upward from already elevated levels. While the 7-year Treasury yield saw a slight increase, potentially reflecting these rising expectations, the 2- and 5-year yields declined, creating a mixed yield curve signal.

Shifting focus to consumer health, sentiment weakened noticeably. The Conference Board’s Consumer Confidence report fell short of expectations for the fifth consecutive month, albeit with potential for upward revisions. The University of Michigan’s sentiment index confirmed this trend, plunging 12% in February, with the expectations component dropping a precipitous 18% (and over 30% since November 2024). Personal spending also came in below forecasts (0.4% versus 0.5%), suggesting a potential pullback in consumer demand.

Meanwhile, business activity offered conflicting signals. Services Purchasing Managers’ Index (PMI) exceeded expectations, indicating strength in a crucial economic sector. However, manufacturing PMI disappointed. Countering this, durable goods orders provided a positive surprise, with core orders significantly exceeding expectations at 0.7% (versus 0.2%), offering some optimism for manufacturing. While manufacturing is smaller than services, its cyclical nature makes it a valuable economic indicator.

Markets are grappling with these mixed signals amidst a backdrop of tariff uncertainty. Investors will closely scrutinize upcoming data to determine the economy’s true trajectory and the persistence of inflationary pressures.

Spotlight

Federal Reserve Independence: Safeguarding Economic Stability and Inflation Control

When the Federal Reserve is no longer an independent party, it can have significant implications for the market. In practice, independence means that the Fed can set interest rates without interference from Congress or the White House, even if politicians are unhappy with Fed policy and say so publicly. This independence allows the Fed to make unpopular decisions, such as raising interest rates when necessary to maintain economic stability. If the Fed loses its independence, it may face political pressures to overstimulate the economy for short-term gains, leading to higher inflation and less stable economic conditions.

Research supports the case that economies with independent central banks tend to have lower and less volatile inflation rates. For example, the European Central Bank (ECB) was established with sufficient powers to prevent inflationary expectations from becoming embedded in the economy. This independence has allowed the ECB to make difficult but necessary monetary policy decisions in pursuit of stable prices. Furthermore, as stated in a research piece called Central Bank Independence and Macroeconomic Performance: Some Comparative Evidence, a positive relationship between the degree of independence of central banks and lower and less volatile inflation outcomes was found. This independence has contributed to a period of low macroeconomic volatility, known as the Great Moderation, where global labor supply and production capacity increased significantly, stabilizing prices and wages even in the face of strong demand. Additionally, according to Brookings, political interference in monetary policy can generate undesirable boom-bust cycles, ultimately leading to a less stable economy and higher inflation.

Flowchart of the Fed’s Mandates Impacting Individual Americans

Source: The Federal Reserve

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Congress has given the Federal Reserve operational independence to ensure that monetary policy decisions are long-term, data-driven, and objectively analyzed to best serve all Americans. Despite this independence, the Fed remains accountable to Congress and the public through transparent communications. For instance, the Fed Chair testifies before congressional committees twice a year on economic developments and the Fed’s actions to promote maximum employment and stable prices. Ending the Fed’s independence could result in short-term bouts of inflation and deflation, but in the long run, prices might remain stable. However, massive borrowing could spark significant economic challenges. Investors and advisors must be aware of these risks and consider strategies that can adapt to the evolving market conditions.

Week Ahead…

The labor market will be a central theme this week, particularly following the Federal Reserve’s recent emphasis on its strength. Investors are keen to see if this trend continues, and several key reports will provide critical insights.

  • Tuesday: The Bureau of Labor Statistics releases the February Job Openings and Labor Turnover Survey (JOLTS) report, offering detailed data on job openings, hires, and separations, which are essential for understanding labor market dynamics.
  • Wednesday: The ADP Nonfarm Payroll report provides an early, though sometimes divergent, preview of the broader employment picture. Market reactions to this report may be subdued, however, as investors await Friday’s more comprehensive data.
  • Friday: The market will digest a slew of major jobs reports, including Nonfarm Payrolls, Average Hourly Earnings, and the Unemployment Rate. The projected uptick in the unemployment rate to 4.2% will be closely watched, and any deviations could significantly impact market projections.
  • Friday (later): Federal Reserve Chairman Jerome Powell’s speech will be intensely scrutinized for clues regarding future monetary policy.

In addition to the labor market data, several PMI reports will offer valuable insights into the broader economy:

  • Monday: The Chicago PMI will be released, providing an early glimpse into regional manufacturing activity.
  • Throughout the Week: S&P Global will finalize its March manufacturing and services PMI numbers, and the ISM Manufacturing and Services PMI will also be released.
  • Key Focus: The ISM Prices component within these indices will be closely monitored as an indicator of inflationary pressures. This survey data will help markets better understand the overall direction of the economy.

Taken together, this week’s data releases and Fed commentary will provide a clearer picture of the economy’s current trajectory and inform market expectations for the months ahead.

This content was developed by Cambridge from sources believed to be reliable. This content is provided for informational purposes only and should not be construed or acted upon as individualized investment advice. It should not be considered a recommendation or solicitation. Information is subject to change. Any forward-looking statements are based on assumptions, may not materialize, and are subject to revision without notice. The information in this material is not intended as tax or legal advice.

Investing involves risk. Depending on the different types of investments there may be varying degrees of risk. Socially responsible investing does not guarantee any amount of success. Clients and prospective clients should be prepared to bear investment loss including loss of original principal. Indices mentioned are unmanaged and cannot be invested into directly. Past performance is not a guarantee of future results.

The Dow Jones Industrial Average (DJIA) is a price-weighted index composed of 30 widely traded blue-chip U.S. common stocks. The S&P 500 is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy. The NASDAQ Composite Index is a market-value weighted index of all common stocks listed on the NASDAQ stock exchange.

Securities offered through Cambridge Investment Research, Inc., a broker-dealer, member FINRA/SIPC, and investment advisory services offered through Cambridge Investment Research Advisors, Inc., a Registered Investment Adviser. Both are wholly-owned subsidiaries of Cambridge Investment Group, Inc. V.CIR.0325-1292

Market Commentary | March 24th, 2025

Market Commentary | March 24th, 2025

by | Mar 24, 2025 | Market Commentary

Week in Review…

Amid the plethora of economic reports and a Federal Open Market Committee (FOMC) meeting, market indices closed the week slightly higher as markets grappled with a resilient economy and future inflation expectations.

  • The S&P 500 rose by 0.51%
  • The Dow Jones Industrial Average increased by 0.60%
  • The tech-heavy Nasdaq rose by 0.17%
  • The 10-Year Treasury yield closed at 4.25%

The FOMC decision to maintain the federal funds rate at 4.25% to 4.5% was the week’s key development, signaling a cautious approach amid economic uncertainties. The Fed acknowledged solid growth and a strong labor market but remains vigilant about persistent inflation. Their data-dependent strategy, coupled with a slowed pace of Treasury security reduction, reflects a delicate balance between maximizing employment and returning inflation to the 2% target.

Retail consumer data provided a mixed picture. Core retail sales met expectations with a 0.3% month-over-month increase, a welcome recovery from January’s revised -0.6%. Headline retail sales, while positive at 0.2% and a substantial improvement from the previous month, fell short of forecasts. Business inventories aligned with projections, growing by 0.3%. The NY Empire State Manufacturing Index, known for its volatility, offered a surprisingly bearish outlook at -20.0, which should be interpreted with caution.

February’s housing data revealed a potentially more resilient sector. Housing starts surged to 1.501 million, well above forecasts, indicating a strong rebound from January’s dip. Existing home sales also surpassed expectations, reaching 4.26 million. While building permits saw a slight decrease to 1.456 million, the overall trend suggests January’s housing slowdown may have been an anomaly, and the market could be exhibiting stronger underlying momentum.

Spotlight

Gold in Modern Portfolios: Balancing Diversification, Inflation Hedging, and Safe Haven Potential

I. Introduction: Gold’s Enduring Appeal

Gold has long been valued in finance as both a currency and a store of value. Its qualities – durability, scarcity, divisibility, and fungibility – have cemented its historical status. In modern portfolios, gold is considered for diversification and hedging, but its role as a “safe haven” requires nuance. This article explores gold’s significance, diversification benefits, its role as an inflation hedge, its long-term performance, and portfolio allocation, acknowledging investor profiles, market conditions, and the limitations of gold as a safe haven.

II. Diversification Benefits and Modern Portfolio Theory

Gold’s inclusion in a diversified portfolio aligns with Modern Portfolio Theory (MPT), which suggests that an optimal portfolio maximizes expected returns for a given risk level. Gold’s unique characteristics, 

 

including its low or negative correlation with equities and bonds, can enhance risk-adjusted returns and potentially reduce portfolio volatility. Studies indicate that adding gold can, in some cases, improve returns and Sharpe ratios while lowering drawdowns.

However, correlations across asset classes are not stable. Gold’s behavior varies; there are periods when it moves with the stock market and others when it moves oppositely. At times, gold acts as a hedge against a falling stock market, highlighting its role in a diversified portfolio. Gold’s volatility is often driven by sharp upside movements rather than corrections, making it a valuable asset during market distress. Combining gold with equities can, at times, result in a portfolio with lower volatility than standalone assets.

III. Gold as an Inflation Hedge

Gold often performs well during inflationary periods, preserving wealth and purchasing power by hedging against price inflation and currency devaluation. Its negative correlation with global equities during high inflation highlights its diversification value. As inflation rises, the typical negative correlation between stocks and bonds may weaken, making gold a valuable component for portfolio stability. This inflation hedge potential is crucial to its long-term value.

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IV. A Nuanced View of Its Safe-Haven Status

Gold has shown strong long-term performance, and its ability to preserve wealth and purchasing power makes it a consideration for long-term investment strategies. However, the perception of gold as a “safe haven” requires a nuanced perspective.

Research by Baur and McDermott (2009) highlights that gold can serve as both a hedge and a safe haven for major European stock markets and the U.S., but not necessarily for other developed or emerging markets. The study distinguishes between weak and strong forms of a safe haven, suggesting gold may act as a stabilizing force by reducing losses during extreme negative market shocks, but this effect is more pronounced in developed markets. The chart below reveals gold’s performance in U.S. equity drawdowns of 15% or greater.

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Further analysis by Kuck (2019) reveals that while gold doesn’t move in tandem with stocks, it can exhibit significantly higher volatility in response to negative shocks in the equity market, and this increased volatility can contribute to the risk of a portfolio composed of both gold and equities. The study emphasizes that the effectiveness of gold as a safe haven depends not only on its return behavior but also on its volatility dynamics.

Moreover, the safe haven property of gold is not stable over time. The relationship between gold and equity markets can vary depending on market conditions. During certain periods, gold may act as a hedge, while in others, it may co-move with equities, reducing its effectiveness as a safe haven. This variability underscores the importance of understanding the dynamic nature of correlations between gold and other assets.

While gold can provide some protection during market downturns, it is not an infallible safe haven. Investors should be aware of the potential for increased volatility and the changing nature of gold’s relationship with equity markets.

V. Portfolio Allocation: Tailoring Gold to Individual Needs

Determining the optimal percentage of gold allocation in a portfolio depends on various factors, including risk tolerance, investment objectives, and time horizon. Recommendations from different financial institutions suggest allocations ranging from 5% to 15%, as a modest allocation of 5% to 10% can provide diversification benefits without overly exposing the portfolio to gold’s inherent volatility. Gold’s allocation should be tailored to individual investment goals and market conditions. Investors should periodically review their portfolio to ensure that the gold allocation remains aligned with their overall strategy and risk tolerance.

VI. Conclusion: Gold’s Role in a Balanced Portfolio

Gold remains a unique asset class with a distinct role in investment portfolios. Its dual nature as both a commodity and currency, coupled with its potential to hedge against inflation and diversify portfolios, makes it a consideration for investors. However, it’s crucial to acknowledge that while it can offer some resilience, particularly in certain market conditions, it is not a guaranteed safe haven. A balanced approach to incorporating gold into a portfolio, considering both its potential benefits and limitations, is essential for effective risk management.

Works Referenced:

Arnott, Amy C. “How to Use Gold in Your Portfolio.” Morningstar, Inc., February 27, 2024. Accessed March 20, 2025. https://www.morningstar.com/portfolios/how-use-gold-your-portfolio.

Baur, Dirk G., and Thomas K. McDermott. “Is Gold a Safe Haven? International Evidence.” Journal of Banking & Finance 34, no. 8 (2009). http://ssrn.com/abstract=1516838.

Kuck, Konstantin. “Gold and the S&P500: An Analysis of the Return and Volatility Relationship,” August 19, 2019.

Merk, Axel. “The Case for Gold: Optimal Portfolio Allocation.” Report. Merk Investments LLC, 2014.

SPDR® Gold Strategy Team. “The Role of Gold in Today’s Global Multi-Asset Portfolio,” n.d. https://www.ssga.com/library-content/pdfs/etf/us/b30-spdr-the-role-of-gold-in-todays-global-multi-asset-portfolio.pdf.

The Perth Mint. “Gold’s Role in a Modern Portfolio – Why Now Is the Time to Invest in Gold.” The Perth Mint, 2023.

Tiempo Capital. “The Future of Gold: Understanding Gold as a Strategic Asset in Portfolios,” 2024.

Week Ahead…

Following the Federal Reserve’s decision to maintain interest rates this week, the market is poised for a week of critical economic indicators and data releases. The Fed’s outlook, which suggests a potential 50-basis-point cut by year’s end, has set the stage for heightened attention to inflation metrics – particularly the impact of tariffs on prices. The Fed Chair described the influence of tariffs as transitory, indicating that any significant effects may not be immediately evident.

The upcoming Personal Consumption Expenditures (PCE) data, set to be released on Friday, is unlikely to reflect substantial changes stemming from tariffs in the short term. This will be closely monitored by analysts and investors alike, as it could influence perceptions of inflation trends moving forward. Additionally, the state of consumer confidence will be another focal point, especially after a steep decline last month. Observers will be eager to see if confidence improves amid ongoing economic uncertainty, as this could impact consumer spending and overall economic activity.

On Monday, the Manufacturing Purchasing Managers’ Index (PMI) and Services PMI will be announced, providing insight into the health of these critical sectors. These indices are essential for gauging economic expansion and overall activity, which could be influenced by both consumer sentiment and inflation expectations.

Finally, on Thursday, the final estimate of Q4 gross domestic product (GDP) will be released, with market participants alert for any significant revisions from previous estimates. Any notable changes could have implications for economic strategies and Fed policy considerations moving forward.

This content was developed by Cambridge from sources believed to be reliable. This content is provided for informational purposes only and should not be construed or acted upon as individualized investment advice. It should not be considered a recommendation or solicitation. Information is subject to change. Any forward-looking statements are based on assumptions, may not materialize, and are subject to revision without notice. The information in this material is not intended as tax or legal advice.

Investing involves risk. Depending on the different types of investments there may be varying degrees of risk. Socially responsible investing does not guarantee any amount of success. Clients and prospective clients should be prepared to bear investment loss including loss of original principal. Indices mentioned are unmanaged and cannot be invested into directly. Past performance is not a guarantee of future results.

The Dow Jones Industrial Average (DJIA) is a price-weighted index composed of 30 widely traded blue-chip U.S. common stocks. The S&P 500 is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy. The NASDAQ Composite Index is a market-value weighted index of all common stocks listed on the NASDAQ stock exchange.

Market Commentary | March 10th, 2025

by | Mar 10, 2025 | Market Commentary

Week in Review…

Market indices closed the week lower as markets grappled with the timeframe surrounding tariffs and possible labor market softening.

 

  • The S&P 500 declined by –3.50%
  • The Dow Jones Industrial Average declined by –2.65%
  • The tech-heavy Nasdaq declined by –3.73%
  • The 10-Year Treasury yield closed at 4.32%

Last week, several key economic indicators were released, providing valuable insights into the health of the economy. The ISM Manufacturing Purchasing Managers’ Index (PMI) and Services PMI offered a snapshot of business conditions in the manufacturing and services sectors, respectively. The Manufacturing PMI was higher than forecasted at 52.7, indicating potential expansion in the manufacturing sector. In contrast, the Services PMI was lower than the previous reading at 51, suggesting a contraction in the services sector. The ADP Nonfarm Employment Change report showed a significant decline, coming in at about 50% lower than the previous reading at 77,000, giving an early indication of weakening private-sector employment trends. The initial jobless claims report provided a weekly update on the number of individuals filing for unemployment benefits, showing fewer filings than anticipated. Furthermore, the Average Hourly Earnings report from the Bureau of Labor Statistics provided insights into labor market conditions and wage growth, which increased by 0.3%.

In the energy sector, the Baker Hughes Oil Rig Count was closely watched for insights into drilling activity and future production levels. Friday’s reading showed no change from the previous reading. These indicators, along with the analysis of credit spreads, currency trends, and yield curve positioning, helped investors and policymakers assess the overall economic landscape and make informed decisions.

Spotlight

Small-cap Stocks – Premiums, Global Opportunities, and Recent U.S. Underperformance

Small-cap stocks have been key to investment portfolios, offering growth and diversification. Historically, they have outperformed larger stocks, a fact often referred to as the size premium. However, they vary across sectors and regions, each with unique risk-reward profiles. This article explores small-cap investing, highlighting global opportunities and recent U.S. underperformance. Understanding these dynamics helps investors make informed decisions and strategically allocate assets for maximum returns.

 

The size premium is the higher expected returns associated with smaller companies compared to larger firms over extended periods. This phenomenon is supported by historical data dating back to at least 1998, demonstrating that smaller companies have yielded higher returns in both U.S. and non-U.S. markets. The persistence of the size premium remains even after accounting for invest-ability constraints, indicating that the premium is not merely a result of illiquidity or limited investment capacity. Additionally, academic research identifies a “sweet spot” within the mid-cap and low-size factors, which can be leveraged to construct more efficient portfolios. The robustness of the size premium across different regions and economic regimes, coupled with its validation through academic studies, underscores its significance as a critical factor in investment strategies.

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Consequently, when looking to allocate towards small-cap stocks, it’s important to recognize that they are not a homogeneous group, as these stocks span various sectors and geographies, each with unique risk-reward profiles. Global small caps, in particular, present compelling risk-reward tradeoffs compared to large caps and emerging markets. Historically, global small caps have delivered higher returns than global large caps, averaging 8.5% versus 5.5% for 10-year periods. Additionally, they have exhibited lower volatility than emerging markets, making them an attractive option for investors seeking growth with manageable risk. Diversification across different countries helps mitigate some of the inherent volatility associated with small caps. Furthermore, international small caps have lower correlations with U.S. large caps, enhancing portfolio diversification and providing a buffer against domestic market fluctuations. However, global small caps are not free of risk, investors must often contend with deeper drawdowns in comparison to large caps. The graph below illustrates recent instances of significant drawdowns observed during periods of economic decline.

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Small-cap stocks are traditionally seen as procyclical, benefiting from economic upswings. However, their recent underperformance has defied this expectation. Despite periods of significant economic growth, such as in 2021 and the third quarter of 2023, where gross domestic product (GDP) growth was close to 5%, small caps have struggled. This is a stark contrast to their performance during the recovery from the Great Financial Crisis in 2009 and 2010. Over the past decade, the broad U.S. small-cap index has averaged a 6.5% annual return, significantly lower than the 11% return of the broad U.S. equity market. This underperformance, particularly in old economy sectors like financials and industrials, challenges the conventional wisdom that small caps always thrive in growth periods. Investors must now question these traditional rules and pay closer attention to the underlying fundamentals of small-cap stocks.

The recent underperformance of small-cap stocks presents a conundrum for investors. While historical performance suggests a disciplined approach to small-cap allocations, the ever-changing economic landscape reminds us that past trends cannot predict future outcomes. Investors must carefully consider how they allocate to small-cap stocks, as these decisions could significantly influence future returns. By staying adaptable and informed, investors can navigate the complexities of small-cap investing and position themselves for long-term success.

Works Referenced:

Arnott, Amy C. “How to Use Small-Cap Stocks in Your Portfolio.” Morningstar, Inc., June 18, 2024.
https://www.morningstar.com/portfolios/how-use-small-cap-stocks-your-portfolio.

Lefkovitz, Dan. “Are Small-Cap Stocks Worth Investing In?” Morningstar, Inc., November 27, 2023.
https://www.morningstar.com/stocks/are-small-cap-stocks-worth-investing-2.

Oberoi, Raina, Anil Rao, Lokesh Mrig, Raman Aylur Subramanian, and MSCI Inc. “ONE SIZE DOES NOT FIT ALL.” MSCI.COM, 2016.

Royce Research Financial Professionals. “Global Small-Caps: A World of Overlooked Opportunities.” Royce Investment Partners, n.d.

Week Ahead…

The week starts slow with no new economic data on Monday, though it picks up quickly on Tuesday with the Job Openings and Labor Turnover Survey (JOLTS) report, which will provide an early glimpse into the labor market’s strength and demand for workers. However, the week’s main event is undoubtedly Wednesday’s release of the latest Consumer Price Index (CPI) data. Investors and economists will be dissecting the numbers for any signs of changing inflationary trends, as these figures could significantly influence the Federal Reserve’s upcoming policy decisions. It’s important to note that any effects from recent tariff implementations are unlikely to be reflected in this particular CPI release.

Thursday brings the usual release of initial jobless claims and the Producer Price Index (PPI). The jobless claims data will be particularly interesting to monitor, especially after the surprising spike observed in the previous week. The PPI will offer additional insights into inflationary pressures building within the wholesale sector, complementing the CPI data and providing a more comprehensive view of the overall inflation landscape.

This content was developed by Cambridge from sources believed to be reliable. This content is provided for informational purposes only and should not be construed or acted upon as individualized investment advice. It should not be considered a recommendation or solicitation. Information is subject to change. Any forward-looking statements are based on assumptions, may not materialize, and are subject to revision without notice. The information in this material is not intended as tax or legal advice.

Investing involves risk. Depending on the different types of investments there may be varying degrees of risk. Socially responsible investing does not guarantee any amount of success. Clients and prospective clients should be prepared to bear investment loss including loss of original principal. Indices mentioned are unmanaged and cannot be invested into directly. Past performance is not a guarantee of future results.

The Dow Jones Industrial Average (DJIA) is a price-weighted index composed of 30 widely traded blue-chip U.S. common stocks. The S&P 500 is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy. The NASDAQ Composite Index is a market-value weighted index of all common stocks listed on the NASDAQ stock exchange.

Market Commentary | March 3rd, 2025

by | Mar 3, 2025 | Market Commentary

Week in Review…

Most market indices closed the week lower as new U.S. data sparked concern among investors over a slowing economy and sticky inflation, leading them in search of safer assets.

 

  • The S&P 500 declined by -0.98%
  • The Dow Jones Industrial Average increased by 0.95%
  • The tech-heavy Nasdaq declined by -3.47%
  • The 10-Year Treasury yield closed at 4.25%

Last week, a slew of housing reports provided the market with a clearer understanding of the sector, but the data did not inspire much confidence.

On Wednesday, January New Home Sales data came in weaker than expected at 657,000 units, compared to the estimated 679,000 units. This was a significant drop from last month’s figure of 734,000 units, representing a decline of 10.5%. Building permits, a key indicator for future housing starts, were revised lower. Although the data came in higher than initially projected, this revision diminishes the previous week’s outperformance and may prompt markets to re-evaluate future projections.

Additionally, January Pending Home Sales month-over-month numbers declined by 4.6%, exceeding expectations of a 0.9% decline. This marked the second consecutive month of declining volume, with both January and December experiencing declines greater than 4%. In the background of this housing data was the sharp rise in 30-year mortgage rates, which bottomed in mid-December at 6.60% and peaked in mid-January at 7.04%, before ending the month at 6.95%. February has seen a steady decline in rates, and markets will closely monitor future reports to gauge how much demand lower rates might release.

Speaking of interest rates, markets observed movements in yields in the middle of the curve this week as 2-, 5-, and 7-year notes were auctioned off. Across the board, yields fell compared to last month. This decline in yields could be attributed to various factors, including sluggish housing data, weakening consumer confidence, and modest Q4 GDP data.

Perhaps the best news for markets last week came on Friday, as the Core Personal Consumption Expenditure (PCE) Price Index was in line with analyst expectations. January’s year-over-year numbers came in at 2.6%, significantly lower than December’s reading of 2.9%. This benign reading may help alleviate some of the inflation and stagflation fears that had been brewing since the hotter-than-expected Consumer Price Index (CPI) reading earlier this month.

The fall in yields and middling inflation numbers can be interpreted in various ways. Some might attribute it to the recent housing data, consumer confidence figures from Tuesday, and the modest Q4 GDP data influenced by personal spending. However, one week of data does not establish a trend, and markets will continue to look for emerging patterns. 

Spotlight

The Evolution and Implication of the Commercial Real Estate Maturity Wall

Rising interest rates by the Federal Reserve, coupled with shifts in the post-pandemic landscape, continue to place significant strain on commercial real estate (CRE) mortgages, which are grappling with refinancing difficulties. The concept of the “maturity wall” within the CRE mortgage sector has been a topic of concern since the early stages of this cycle. The primary worry is that upcoming loan maturities could hinder borrowers’ efforts to refinance or alter their loans in a capital market that is increasingly costly and restrictive. Following up on this theme that was discussed in summer of 2023, in this spotlight, we will delve into how this narrative has developed over time and provide investors with a clearer understanding of the implications of the “maturity wall.”

 

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It is important for investors to understand the size and different players of the CRE debt market:

  • As of Q3 of 2024, according to the Mortgage Bankers Association (MBA), the CRE mortgage market for income-producing properties is approximately $4.75 trillion
  • A variety of lender types contribute capital to the sector, with the largest sources being depositors (banks and thrifts) and government-sponsored enterprises (GSE), which together account for over half of the commercial real estate (CRE) market. Following them are life insurance companies, commercial mortgage-backed securities (CMBS), collateralized debt obligations (CDOs), asset-backed securities (ABS), and other credit firms.
  • In addition, investors should be aware that CRE mortgages have a weighted average maturity of seven years, which means about 14% of the entire mortgage universe is expected to mature every year for any year. Given the $4.75 trillion market size of CRE mortgages, that translates to roughly $650 billion of CRE mortgages will mature on average annually, and $1.95 trillion to mature over the next three years.

With this context in mind, the maturity of $958 billion over the next year and $2.1 trillion over the next three years is not far off from what we may typically expect to see each year.

When examining the maturity wall by property type, we still see areas of distress that are likely to emerge as these loans come due. The office sector raises particular concerns, continuing to struggle with the impact of post-Covid work-from-home and hybrid work policies. Notably, 24% of all office loans are set to mature in 2025, unless they are extended. Other sectors will also encounter their own distinct challenges, influenced both by capital market conditions and fundamental factors.

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Considering where we are in the current economic cycle, the delinquency rate in the CRE market may worsen before it improves, especially as more loans approach their maturity dates. However, the level of distress may not be as severe as the market has anticipated. This is largely due to stronger underwriting standards established since the GFC, as well as loan modifications and extensions, and solid property fundamentals. The most significant distress is expected to manifest in loans secured by office properties, floating-rate loans, and short-term loans which originated during the peak pricing of 2022.

The CRE maturity wall situation presents a mixed outlook, with some experts such as PIMCO noting positive signs in certain sectors while cautioning against expectations of a rapid recovery. Regulatory changes may be implemented to manage banks’ CRE exposure, and Federal Reserve actions could provide some relief to borrowers, though pre-pandemic interest rates are unlikely to return soon. The implications for investors vary, with REITs potentially facing challenges due to declining property values, especially in the office sector, while private equity firms might find opportunities in distressed assets. In general, individual investors may exercise caution in these uncertain markets, where risks and opportunities coexist depending on specific property types and locations.

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Week Ahead…

Next week, several key economic indicators will be released, providing valuable insights into the health of the economy.

The ISM Manufacturing Purchasing Managers’ Index (PMI) and Services PMI will offer a snapshot of business conditions in the manufacturing and services sectors, respectively. The Manufacturing PMI is forecasted to be higher than the previous reading at 51.6, indicating potential expansion in the manufacturing sector. In contrast, the Services PMI is forecasted to be lower than the previous reading at 49.7, suggesting a contraction in the services sector. The ADP Nonfarm Employment Change report will give an early indication of private-sector employment trends, while the Initial Jobless Claims report will provide a weekly update on the number of individuals filing for unemployment benefits. Furthermore, the Average Hourly Earnings report from the Bureau of Labor Statistics will provide insights into labor market conditions and wage growth, which is anticipated to increase by 0.3%.

In the energy sector, the Baker Hughes Oil Rig Count will be closely watched for insights into drilling activity and future production levels. These indicators, along with the analysis of credit spreads, currency trends, and yield curve positioning, will help investors and policymakers assess the overall economic landscape and make informed decisions.

This content was developed by Cambridge from sources believed to be reliable. This content is provided for informational purposes only and should not be construed or acted upon as individualized investment advice. It should not be considered a recommendation or solicitation. Information is subject to change. Any forward-looking statements are based on assumptions, may not materialize, and are subject to revision without notice. The information in this material is not intended as tax or legal advice.

Investing involves risk. Depending on the different types of investments there may be varying degrees of risk. Socially responsible investing does not guarantee any amount of success. Clients and prospective clients should be prepared to bear investment loss including loss of original principal. Indices mentioned are unmanaged and cannot be invested into directly. Past performance is not a guarantee of future results.

The Dow Jones Industrial Average (DJIA) is a price-weighted index composed of 30 widely traded blue-chip U.S. common stocks. The S&P 500 is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy. The NASDAQ Composite Index is a market-value weighted index of all common stocks listed on the NASDAQ stock exchange.

 

Securities offered through Cambridge Investment Research, Inc., a broker-dealer, member FINRA/SIPC, and investment advisory services offered through Cambridge Investment Research Advisors, Inc., a Registered Investment Adviser. Both are wholly-owned subsidiaries of Cambridge Investment Group, Inc. V.CIR.0325-0813

 

Market Commentary | February 24th, 2025

by | Feb 24, 2025 | Market Commentary

Week in Review…

Major market indices closed the week lower as new U.S. data sparked concern among investors over a slowing economy and sticky inflation, leading them in search of safer assets.

 

  • The S&P 500 declined by –1.66%
  • The Dow Jones Industrial Average declined by –2.51%
  • The tech-heavy Nasdaq declined by –2.26%
  • The 10-Year Treasury yield closed at 4.43%

Last week was shorter for the U.S. market due to Presidents Day on Monday, but it was still packed with key economic data releases.

On Wednesday, the Fed Minutes showed that officials are generally at ease with their decision to keep interest rates unchanged from their recent meeting. They didn’t indicate any immediate shifts in their cautious approach to rate cuts. Following January’s meeting, Fed Chair Jerome Powell mentioned that the central bank would require “real progress on inflation” or an unexpected downturn in the labor market before considering further rate reductions.

In terms of the housing market, U.S. existing-home sales dropped by 4.9% in January compared to the previous month, landing at a seasonally adjusted annual rate of 4.08 million, as reported by the National Association of Realtors on Friday. Elevated home prices and mortgage rates continued to weigh on sales throughout January, discouraging many potential buyers. Some first-time homebuyers have found themselves priced out, while existing homeowners are opting to stay in their current homes rather than give up low mortgage rates.

Additionally, we saw the consumer sentiment index from The University of Michigan fall sharply to 64.7 at the end of February, down from January’s reading of 71.7. The survey highlighted particular concerns regarding buying conditions for durable goods, products designed to last at least five years, largely driven by fears of imminent tariff-related price increases.

Finally, the services and manufacturing purchasing managers’ index (PMI) indices were released. The services sector experienced expansion for the seventh month in a row in January, marking the 53rd month of growth since the economy began recovering from the pandemic-induced recession in June 2020. Meanwhile, the manufacturing sector showed signs of growth in January, ending a 26-month stretch of contraction.

Spotlight

Social Media’s Financial Gurus:

Are They Leading You to Fortune or Folly? 

Financial influencers (finfluencers) have gained significant popularity in recent years, leveraging social media platforms to share investment advice and insights. According to Wesleyan’s The Next Step, finfluencers have taken social media by storm, particularly on platforms like TikTok with trends such as “FinTok”. While finfluencers make complex financial concepts more relatable and accessible, they often lack formal financial education or certifications. This lack of credentials and regulation can lead to the spread of misinformation, as social media platforms are vast and fast-moving, making it difficult to police content effectively.

MSN highlights that a significant portion of Gen Z looks to TikTok finfluencers for financial advice. While these influencers can make financial advice more accessible, there is a risk that young adults may not be saving as much as they could if they relied on more traditional financial advice. The article also emphasizes the importance of teaching young people to critically evaluate the financial advice they encounter on social media. A study from the Financial Industry Regulatory Authority (FINRA) found that 60% of younger investors use social media as a source of investment information, compared to 35% of those between 35 to 54 and only 8% of those 55 and older.

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Source: CFA Institute, The Finfluencer Appeal: Investing in the Age of Social Media

While many of these influencers provide valuable information, there is a growing concern about the potential for misleading investors. One way financial influencers can mislead investors is through the promotion of specific stocks or financial products without disclosing their own financial interests. For example, an influencer might recommend a particular stock because they hold a significant position in it and stand to benefit from a price increase. This lack of transparency can lead investors to make decisions based on biased information, ultimately resulting in financial losses.

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Another way finfluencers can mislead investors is by oversimplifying complex financial concepts. Investing is inherently risky and requires a thorough understanding of market dynamics, financial instruments, and risk management strategies. However, some influencers may present investment opportunities as “sure bets” or “guaranteed returns,” downplaying the associated risks. This can create unrealistic expectations among investors, who may then make poorly informed decisions. Additionally, the use of sensationalist language and hype can drive irrational behavior, such as panic buying or selling, which can further exacerbate market volatility.

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Furthermore, there are regulatory challenges related to the location of finfluencers and their audience. The Securities and Exchange Commission (SEC) has jurisdiction over investment advice provided to U.S. investors. However, if an influencer is based in a different country, the SEC’s ability to enforce regulations becomes complicated. Similarly, investors acting on advice from influencers located outside their own country may face difficulties in seeking recourse if the advice leads to financial losses. This jurisdictional issue can create a regulatory gap, leaving investors vulnerable to misleading information without adequate protection.

Moreover, financial influencers can mislead investors by providing advice that is not tailored to individual circumstances. Every investor has unique financial goals, risk tolerance, and investment horizon. Generic advice that does not take these factors into account can be detrimental. For instance, an influencer might advocate for aggressive investment strategies that are unsuitable for risk-averse individuals or those nearing retirement. This one-size-fits-all approach can lead to inappropriate investment choices and potential financial hardship.

While financial influencers can offer valuable insights, it is crucial for investors to approach their advice with caution. Conducting independent research, seeking advice from licensed financial professionals, and considering one’s own financial situation are essential steps to making informed investment decisions. Additionally, being aware of the regulatory challenges related to the location of influencers and investors can help mitigate potential risks.

Week Ahead…

As we look ahead to the coming week, the Conference Board will release the consumer confidence index on Monday. Following the sharp downturn in consumer sentiment last week, economists are intrigued to see whether the confidence index mirrors this trend.

On Wednesday, we can expect the data for new home sales. After a surprisingly strong showing earlier in the year, economists will be watching to see if the upward momentum continues, especially considering the decline in existing home sales this month.

Thursday brings the preliminary estimate of gross domestic product (GDP), which the market will focus on sharply, particularly if there are any significant revisions from last month’s advanced estimates.

Finally, we will wrap up the week with the Personal Consumption Expenditure (PCE) data on Friday. This report is the Federal Reserve’s preferred gauge of inflation, and it will be closely watched by economists and investors alike.

This content was developed by Cambridge from sources believed to be reliable. This content is provided for informational purposes only and should not be construed or acted upon as individualized investment advice. It should not be considered a recommendation or solicitation. Information is subject to change. Any forward-looking statements are based on assumptions, may not materialize, and are subject to revision without notice. The information in this material is not intended as tax or legal advice.

Investing involves risk. Depending on the different types of investments there may be varying degrees of risk. Socially responsible investing does not guarantee any amount of success. Clients and prospective clients should be prepared to bear investment loss including loss of original principal. Indices mentioned are unmanaged and cannot be invested into directly. Past performance is not a guarantee of future results.

The Dow Jones Industrial Average (DJIA) is a price-weighted index composed of 30 widely traded blue-chip U.S. common stocks. The S&P 500 is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy. The NASDAQ Composite Index is a market-value weighted index of all common stocks listed on the NASDAQ stock exchange.

Securities offered through Cambridge Investment Research, Inc., a broker-dealer, member FINRA/SIPC, and investment advisory services offered through Cambridge Investment Research Advisors, Inc., a Registered Investment Adviser. Both are wholly-owned subsidiaries of Cambridge Investment Group, Inc. V.CIR.0225-0720