Market Commentary February 17th, 2025

by | Feb 17, 2025 | Market Commentary

Week in Review…

Major market indices closed the week on a positive note, driven by robust data on the economic front, as the economy remains resilient despite trade and policy uncertainty.

 

  • The S&P 500 rose +1.47%.
  • The Dow Jones Industrial Average inched higher by +0.55%.
  • The tech-heavy Nasdaq rose +2.90%.
  • The 10-Year Treasury yield closed at 4.48%.

Last week’s economic reports painted a concerning picture of sticky inflation and weakening demand, though the labor market remained a point of strength.

Inflation worries intensified following Wednesday’s Consumer Price Index (CPI) release, where both headline and core figures exceeded expectations. Core CPI’s 0.4% month-over-month increase was the highest since April 2023, while headline CPI rose 0.5%, the largest jump since October 2023. Thursday’s Producer Price Index (PPI) report offered little relief, with core PPI meeting expectations at 0.3% and headline PPI slightly exceeding them at 0.4%. These data points suggest that taming inflation to the Fed’s 2% target may be a longer and more arduous journey than previously anticipated. Consequently, the market has nearly eliminated the possibility of a March 2025 rate cut, with the probability of a 25 bps reduction falling to a mere 2.5% as of Friday.

Demand-side concerns arose with Friday’s disappointing retail sales data. Core retail sales contracted by 0.4% month-over-month, significantly missing the expected 0.3% increase. This decline has raised concerns about Q1 gross domestic product (GDP) growth, with some analysts suggesting it could fall short of 2%, while some attribute the weak numbers to the post-holiday season and winter weather. Either way, the market will be closely watching future retail sales data for further signs of weakening consumer spending. Adding to demand concerns, crude oil inventories underperformed for the seventh consecutive week. While high spot oil prices may be masking the underlying weakness in demand for now, lower prices will likely force a reassessment of this trend.

Despite these concerns, the labor market continues to show resilience. Both continuing and initial jobless claims were lower than expected, with continuing claims beating estimates in five of the last seven weeks and initial claims in four of the last seven. Additionally, January’s industrial production in the manufacturing sector outperformed expectations, providing a bright spot. Finally, business and retail (ex-auto) inventories shrank more than anticipated, further confirming the strength seen in December’s data.

Spotlight

Pennies Out, Prices Up:

The Market Ripple Effect

It’s evident that pennies cost more to produce than their actual value. In 2024, the U.S. Mint spent approximately 3.69 cents to manufacture each penny, resulting in costs exceeding their face value for the 19th consecutive fiscal year. Furthermore, the latest U.S. Mint report indicates that nickels might also be at risk, as each 5-cent piece costs around 13.78 cents to make. However, halting the production of new pennies is anticipated to have significant implications for the stock market and the broader economy.

The outcome from the elimination of the penny will necessitate rounding prices to the nearest five cents for cash transactions. For example, a $6.99 item might be re-priced at $7.00. While this may seem minor, the cumulative effect of such rounding could lead to an overall increase in the cost of goods, thus leading to a slight inflationary effect. However, digital bills and credit card transactions will be charged as normal, without any rounding adjustments.

Unit Cost of Producing and Distributing Coins 

(click image to expand)

This inflationary pressure can impact consumer spending habits. As prices rise, consumers may become more cautious with their spending, particularly on small, everyday purchases. This shift in consumer behavior can affect the revenue of businesses that rely heavily on high volumes of small transactions, such as fast food chains and convenience stores. A decrease in consumer spending can lead to lower sales and, consequently, impact the stock prices of these companies.

Moreover, the broader market could experience indirect effects from this change. Investors may overreact or underreact to the anticipated changes in consumer behavior and business revenue projections, leading them to exit or enter positions that may fall outside of their typical investment style. Companies expected to be negatively impacted by the rounding up of prices may see a decline in their stock prices as investors adjust their expectations. Conversely, businesses that can adapt quickly and efficiently to the new pricing structure may gain investor confidence, potentially leading to an increase in their stock prices.

Additionally, this move is expected to support the shift towards electronic payments, benefiting large conglomerates such as Visa, Mastercard, and other real-time payment networks. As consumers and businesses transition to electronic transactions, these companies could see increased usage and revenue. According to the Federal Reserve, since the pandemic, consumers have shifted towards greater card usage, with predictions for this trend to continue increasing in the future.

Type of Payment Instrument Used Throughout the Years

(click image to expand)

Overall, the end of the penny is more than just a minor adjustment; it has significant implications for the stock market. The slight inflationary effect from rounding prices can influence consumer spending, affect business revenues, and ultimately impact market dynamics. Investors will need to closely monitor these changes and adjust their strategies accordingly to navigate the evolving economic landscape.

Week Ahead…

Next week brings a flurry of economic data releases, offering crucial insights into the health of the housing market, the Federal Reserve’s thinking, and overall economic activity. From key housing reports to Fed speeches and sentiment surveys, economists will be watching closely for clues about future economic direction.

Next week offers key insights into the housing market, with January Building Permits and Housing Starts data released Wednesday, and Existing Home Sales on Friday. While the former predicts future housing activity, the latter signals current market strength and consumer health, crucial for economic growth.

The Fed will also be in focus. Three Federal Open Market Committee (FOMC) members will speak throughout the week, potentially hinting at future policy. With a March rate hold widely expected, attention will likely center on potential Q2 or Q3 rate cuts. Markets will analyze these appearances, along with Thursday’s FOMC meeting minutes, to glean insights into the Fed’s thinking and anticipate future moves.

Beyond housing and the Fed, Manufacturing and Services Purchasing Managers’ Index (PMI) data will offer a snapshot of sector health, with the Services PMI particularly important given its influence on GDP. Finally, Friday’s University of Michigan reports on inflation expectations, consumer expectations, and consumer sentiment will provide valuable data on consumer behavior and potential economic trends.

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.0225-0636

Market Commentary | February 10th, 2025

by | Feb 10, 2025 | Market Commentary

Market Commentary | February 10th, 2025

Week in Review…

Major market indices ended the week lower due to mixed economic data. For the week ending February 7, 2025:  

  • The S&P 500 closed down -0.24%.
  • The Dow Jones Industrial Average was lower, down -0.54%
  • The tech-heavy Nasdaq fell to -0.53%
  • The 10-Year Treasury yield closed at 4.49%.

Major market indices concluded the week on a lower note amidst concerns over rising inflation. The S&P 500 ended with a decline of 0.24%, while the Dow Jones Industrial Average saw a decrease of 0.54%. The Nasdaq, known for its tech stocks, fell by 0.53%. Meanwhile, the 10-Year Treasury yield settled at 4.49%.

Last week offered a mixed bag of signals for market watchers, particularly regarding the health of the labor market. Conflicting data points left investors parsing through a complex landscape of potential strengths and weaknesses.

The labor market data painted an unclear picture this week. The December Job Openings and Labor Turnover Survey (JOLTS) showed a decrease in job openings to 7.6 million, a drop of 556,000 from the previous month. Initial and continuing jobless claims, along with Nonfarm Productivity, all fell short of expectations, with initial claims being higher than expected for three out of the last four weeks. The January Nonfarm Payroll report indicated moderate growth with 143,000 jobs added, which was below the forecast of 170,000 but in line with the average monthly gain of 166,000 in 2024. This suggests a resilient labor market despite a slight slowdown from December’s impressive figures.

In January, the unemployment rate dipped to 4.0%, highlighting the ongoing strength of employment conditions. This unexpected decrease from December’s 4.1% further underscores the labor market’s resilience. Although the rise in wages could raise inflation concerns, the lower-than-expected Unit Labor Cost reading provided comfort. Notably, significant revisions to 2024 employment data revealed that 589,000 fewer jobs were added last year than initially reported. This adjustment offers a more accurate picture of recent labor market trends, indicating a more gradual growth pattern than previously anticipated.

Beyond labor, other key reports warrant attention. The ISM Manufacturing Prices report indicated higher input costs, potentially foreshadowing future inflation. The December trade deficit widened to $98.4 billion, a figure that will likely be scrutinized given the current focus on trade policy. Finally, crude oil inventories surged, continuing a six-week trend of weaker-than-expected oil demand. Overall, the week presented a wealth of often contradictory data, leaving markets with the challenging task of discerning the true underlying trends.

Spotlight

Tariffs in America: A Historical Perspective 

Throughout American history, tariffs have been a controversial topic. From the nation’s early days, the struggle to find consensus on this issue set the stage for a long-standing debate in American trade policy. As one historian noted, “Except for slavery, tariffs became the most contentious federal policy issue of the 19th century and remained a source of continuous discord until the Great Depression.”

This enduring debate has shaped both domestic and international economic landscapes for over two centuries, reflecting broader tensions between protectionist and free trade ideologies, regional economic interests, and perspectives on national economic development. The ongoing nature of this debate underscores the complexity of balancing domestic industry protection with international trade benefits, highlighting how economic policies are intrinsically linked to political ideologies, regional interests, and changing global economic conditions.

Historical Background

Tariffs have been a contentious issue in American history since the nation’s inception. This became evident in 1789 when James Madison proposed tariffs and tonnage duties to fund the new government’s operations and debt payments. Sectional interests quickly emerged, with Northern manufacturers advocating for high protective tariffs and Southern planters favoring low tariffs. Despite reaching a compromise, tariffs remained controversial, plagued by conflicting regional interests.

Protectionism

Over time, protecting regional interests evolved into safeguarding American interests, leading to the rise of protectionism. Alexander Hamilton articulated the “infant industry” argument in his 1791 Report on Manufactures, suggesting that nascent American industries needed protection from foreign competition. His proposals for differentiated tariff rates laid the foundation for protectionist policies. Henry Clay further advanced these policies through his “American System,” which aimed to protect American industry, foster commerce with a national bank, and develop agricultural markets through federal subsidies. Clay’s protectionist stance met substantial opposition and led to decades of political crises.

Opposition to Protectionism

Opposition to protectionism in the 19th century was significant. Many believed high tariffs would harm consumers and foster corruption through rent-seeking behavior. This opposition was evident in events like the Nullification Crisis of 1832.

Free traders achieved notable victories, such as the Walker Tariff of 1846, which reduced rates and established standardized ad valorem rates. British imports tripled between 1846 and 1857, and tariff revenues increased significantly. The Underwood Tariff of 1913 further reduced tariff rates and introduced the federal income tax as an alternative revenue source.

Early 20th Century

Protectionists enjoyed success with the Fordney-McCumber Tariff of 1922, which restored rates to pre-Underwood levels. This period of high tariff protectionism saw strong domestic economic performance.

However, the Smoot-Hawley Tariff Act of 1930, which raised average tariff rates to nearly 60 percent, proved disastrous. It precipitated a global trade war and exacerbated the Great Depression, leading to a significant decline in world trade and further economic downturn.

Today’s Realities

Tariffs remain a contentious issue, influencing domestic market prices and resource allocation. While history serves as a guide, the contemporary tariff debate has evolved to reflect new realities that have taken center stage. These include China’s economic dominance and trade practices, shifting power balances among major economies, the growing influence of emerging markets, developing nations’ roles in global trade, technological advancements impacting international commerce, environmental concerns, sustainable trade practices, and the complexities of global supply chains.

This ongoing debate highlights the intricate and lasting impact of tariff policies on both economic and political landscapes. Reflecting on the wisdom of the past, one historian observed that trade policy remains a hotly debated topic because, “dollars and jobs are at stake whenever import duties are adjusted.”

Week Ahead…

The economic spotlight will intensify mid-week, as a series of significant reports provide a snapshot of the current economic landscape. These reports, covering inflation, the labor market, consumer spending, and industrial production, will offer a comprehensive view of the economy and influence future policy decisions.

On Wednesday, February 12, the Bureau of Labor Statistics will release the Consumer Price Index (CPI) for January 2025. The previous CPI reading for December 2024 showed a 0.4% increase month-over-month and a 2.9% increase year-over-year. This report is crucial for assessing inflationary pressures on consumers, as it measures changes in the prices they pay for goods and services. The following day, Thursday, February 13, the Producer Price Index (PPI) for January 2025 will be published. The previous PPI reading for December 2024 showed a 0.2% increase month-over-month, below the expected 0.4%. The PPI tracks changes in selling prices received by domestic producers, offering early insights into wholesale inflation trends that may eventually impact consumer prices.

Next week, the Department of Labor will release the weekly initial and continuing jobless claims. The most recent data showed 219,000 initial claims for the week ending February 1, and 1,858,000 continuing claims for the week ending January 18. Economists will be monitoring these figures to see if the trends continue, as low jobless claims may signal a resilient labor market.

Closing out the week on Friday, the retail sales report will be released, measuring total receipts of retail stores, indicating consumer spending levels. Retail sales are a key indicator of consumer spending, which drives a significant portion of economic activity. Strong retail sales suggest robust consumer demand which can support economic growth. Concurrently, the U.S. Baker Hughes Oil Rig Count, a leading indicator of oil production activity, will be released, signaling future oil production levels.

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 | February 3rd, 2025

by | Feb 3, 2025 | Market Commentary

Market Commentary | February 3rd, 2025

Week in Review…

Major market indices experienced a volatile week driven by a combination of earnings releases, new entrants into the artificial intelligence sector, and the Federal Reserve’s rate decision. For the week ending January 31, 2025:

  • The S&P 500 ended down 0.99%
  • The Dow Jones Industrial Average led major indices up 0.27%
  • The tech-heavy Nasdaq finished down 1.64%
  • The 10-Year Treasury yield concluded at 4.541%

The Federal Reserve held its first Federal Open Market Committee (FOMC) meeting of the year and decided to keep the federal funds rate steady at a target range of 4.25% to 4.50%. Chairman Powell emphasized that the Fed would need to see “real progress on inflation” or unexpected weakness in the labor market before considering further rate cuts. This tempered expectations for rate reductions later in the year, as the Fed remains committed to controlling inflation before making policy adjustments.

The Bureau of Economic Analysis reported that the fourth-quarter real GDP grew at an annualized rate of 2.3%. Although this indicates ongoing economic resilience, it fell slightly short of forecasts, suggesting a cooling in consumer and business activity. Additionally, the Personal Consumption Expenditures (PCE) price index, the Fed’s preferred measure of inflation, increased by 0.3% in December, bringing the annual rate to 2.6%. This reinforced the Fed’s cautious approach, as inflation remains above the 2% target despite steady declines over the past year.

Financial markets saw notable volatility, particularly in sectors tied to Artificial Intelligence. Concerns over competition in the global market led to significant declines in equity prices, reflecting investor uncertainty about future growth prospects.

Trade policy also influenced market sentiment. Reports indicated that the administration is considering tariff adjustments on imports from key trading partners, sparking discussions about potential impacts on supply chains and inflation. While the overall economic outlook remains stable, uncertainty surrounding trade relations and monetary policy contributed to cautious investor sentiment.

These developments underscore the ongoing balancing act between controlling inflation, sustaining economic growth, and maintaining market stability. As the year progresses, the interplay between monetary policy decisions, economic indicators, and global trade policies will continue to shape the trajectory of the U.S. economy.

Spotlight

Stargate – America’s Bold AI Initiative 

The Stargate initiative, unveiled by President Donald Trump on January 21, is a $500 billion joint venture aimed at bolstering the United States’ artificial intelligence (AI) infrastructure. This ambitious project brings together leading tech giants1, with the goal of positioning the U.S. as a global leader in AI technology while driving significant economic and technological progress.

Strategic Importance

Many prominent market analysts suggest Stargate may represent a pivotal shift in the approach to AI development and infrastructure. By creating a coalition model where competitors collaborate on shared infrastructure, the initiative addresses the growing need for advanced AI capabilities that exceed the capacity of individual data centers. This collaborative approach is suggested to be crucial for maintaining the U.S.’s competitive edge in the global AI race, particularly against China. The project’s strategic importance is further underscored by its scale and scope. With plans to construct 10 data centers initially, expanding to 20 locations of about half a million square feet each, Stargate aims to create a robust network of AI-powered infrastructure across the nation. The first data center is already under construction in Abilene, Texas, with potential sites being evaluated across the country.

Technological Collaboration

  • Interdisciplinary Research: The Stargate initiative encourages interdisciplinary research, bringing together experts from AI, data science, cybersecurity, and other fields to foster innovation and address complex challenges.
  • Open Innovation Platforms: By establishing open innovation platforms, Stargate aims to facilitate collaboration between academia, industry, and government, accelerating the development and deployment of cutting-edge AI technologies.

Economic Implications

The economic impact of Stargate is expected to be substantial, both in the short and long term:

  1. Job Creation: The initiative is projected to create over 100,000 new jobs, providing an immediate boost to employment and consumer spending.
  2. Infrastructure Investment: The massive $500 billion investment over four years will stimulate economic activity in construction, supply chain, and supporting industries.
  3. Technological Advancement: By enhancing AI capabilities, Stargate is suggested to drive innovation across various sectors, potentially leading to breakthroughs in fields such as healthcare. For instance, Oracle’s CEO highlighted AI’s potential in developing cancer vaccines.
  4. Global Competitiveness: The project aims to enhance U.S. dominance in AI technologies, attracting global investment and talent.
  5. Long-term Growth: The development of AI infrastructure is expected to create new economic opportunities and drive long-term growth in the tech sector and beyond.
  6. Environmental Stewardship: The initiative emphasizes eco-friendly practices in data center construction and operation, utilizing renewable energy and efficient technologies to reduce carbon emissions and support sustainability goals.
  7. Educational Initiatives: Stargate includes programs to enhance AI education and workforce training, preparing for an AI-driven economy. It also plans public awareness campaigns on AI benefits and ethics.

Investor Implications

The project has generated significant investor interest by:

  • Boosting stock performance of involved companies
  • Creating new investment opportunities in AI infrastructure
  • Improving market sentiment toward AI technologies
  • Highlighting potential in data centers and related tech sectors

Challenges and Considerations

Despite its promising outlook, Stargate may have to address several challenges:

  1. Funding Uncertainty: While the initial commitment is $100 billion, the source of the full $500 billion funding remains unclear.
  2. Geopolitical Implications: The involvement of foreign investors could raise questions about national security and technology transfer.
  3. Ethical Considerations: As AI capabilities expand, addressing ethical concerns and potential societal impacts will be crucial.

Following the recent advancements of the Deep Seek project, the Stargate initiative is said to stand out as a groundbreaking endeavor to transform the AI landscape in the United States. Its potential success could greatly enhance the U.S. economy, sustain technological leadership, and open numerous investment opportunities. However, achieving its full potential will require navigating the ambitious scale of the project and the intricate mix of technological, economic, and geopolitical challenges. This is particularly crucial as the U.S. faces increasing competition from China, which is also heavily investing in AI to secure its position as a global leader in technology.

Week Ahead…

The Federal Reserve’s decision to hold rates steady sets the stage for a crucial week of economic data, particularly concerning the labor market. BMO Capital Markets’ Michael Gregory highlighted that “the room to be concerned about stubborn inflation and thus more cautious about policy rate cuts is afforded by a sturdy labor market and the broader economy.” This coming week may either reinforce or challenge that assessment.

The labor market will be in focus, beginning with Tuesday’s Job Openings and Labor Turnover Survey (JOLTS) report, which provides insights into job openings and separations. Its importance is amplified by the 256,000 non-farm payroll jobs added during the covered period. Friday’s January non-farm payroll release will also be pivotal. Following December’s strong performance, another robust number would bolster the Fed’s confidence in its decision. However, the ongoing divergence between ADP and BLS payroll figures adds a layer of complexity. Friday also brings the unemployment rate, currently around 4.1%-4.2%; any significant shift could spark market volatility. Other key labor data includes jobless claims and average hourly earnings.

Beyond the labor market, a series of ISM reports will provide insights into the broader economy. Monday will feature the ISM Manufacturing report, followed by the ISM Services report on Wednesday. Investors will closely watch the Purchasing Managers’ Index (PMI) to gauge sector expansion or contraction, and the Prices Paid component for inflation signals. Thursday’s Nonfarm Productivity and Unit Labor Costs reports will offer additional clues about inflation. In general, productivity growth can enable wage increases without causing inflation, while unit labor costs are a leading indicator of consumer inflation.

 

1https://apnews.com/article/trump-ai-openai-oracle-softbank-son-altman-ellison-be261f8a8ee07a0623d4170397348c41

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 | January 27th, 2025

by | Jan 27, 2025 | Market Commentary

Market Commentary | January 27th, 2025

Week in Review…

As the new president took office this past week, headlines were dominated by the potential impact of campaign promises turning into executive actions.

  • The S&P 500 ended up 1.74%
  • The Dow Jones Industrial Average led major indices up 2.15%
  • The tech-heavy Nasdaq finished up 1.65%
  • The 10-Year Treasury yield concluded at 4.59%

Financial markets responded by actively assessing which sectors stand to gain or lose in the new political landscape, with particular scrutiny on the effects of potential tariffs. However, amidst this political focus, important economic data also emerged, offering insights into the underlying health of the economy.

Strong Corporate Earnings: Several major corporations reported strong Q4 earnings this week, exceeding analysts’ expectations. Streaming services, for example, saw a significant gain, driven by the addition of new subscribers.1 Major banks outperformed Q4 expectations and capped off a strong earning season, reflecting continued strength within the banking sector.

Mixed Signals in Demand: While the housing market showed positive signs with December’s Existing Home Sales exceeding expectations for the third consecutive month, indicating robust consumer spending, the oil market presented a contrasting picture. Crude oil inventories fell short of analyst forecasts for the fourth consecutive week, suggesting sluggish oil demand and potentially weaker overall economic demand.

Softness Around the Edges: Despite these positive earnings reports, some economic indicators revealed areas of concern. The labor market showed signs of weakness with both Continuing and Initial Jobless Claims exceeding expectations for the second consecutive week. This warrants close monitoring for potential labor market softness and rising unemployment. Furthermore, consumer sentiment weakened as indicated by softer-than-expected preliminary Services Purchasing Managers’ Index (PMI) data and disappointing Michigan Consumer Expectations and Sentiment data.  Markets will closely analyze this data as it may signal a weakening consumer.

Spotlight

A Look at Q4 Fund Flows

With January starting off strong for equities, we take a look back at last quarter and summarize fund flows into mutual funds and ETFs to see where investors have positioned for 2025.

 

Flows for 2024 were positive for risk assets, as flows to U.S. equity mutual funds and ETFs took in over $166 billion. With broad concerns about slow growth and home country bias, international equities took in only $17 billion for the year. In bonds, taxable bond flows were the big winner taking in over $482 billion in flows as investors looked to lock in higher yields as the Fed continues its rate cutting regime. Despite the flows to risk assets, money markets took in nearly $677 billion as a whole or 48% of every dollar invested into mutual funds and ETFs. This indicates that investors may still be hesitant to allocate to risk assets. The most interesting takeaway is that 68% of flows into equities came in Q4, which could be indicative of investors’ hopes for stocks in 2025.

 

*Click image to expand

In 2024, global equities as a whole grew to $20 trillion, up from $17 trillion at the end of 2023. Specifically, U.S. equities rose to $16 trillion from $13 trillion at the end of 2023, and currently account for 43% of all long-term assets. Despite strong positive flows in 2024, taxable bonds fell on a market share basis from 16.1% to 15.4%. Another surprise for 2024 was the growth in alternative funds, as the asset class grew by $100 billion from $134 billion.

Moving forward, as the economic backdrop has created tailwinds for risk assets, investors have been positioning equities as the asset class to be in for 2025.

Week Ahead…

Next week, we will have quite a busy week in economic data releases. On Tuesday, we will receive the consumer confidence data from the Conference Board; however, this reading likely will only partially capture the impact of the new administration. The market will be looking for signs of how consumer sentiment is evolving amidst recent policy changes and ongoing economic conditions.

On Wednesday, the Federal Open Market Committee (FOMC) will hold its meeting, and market expectations are leaning towards the Fed maintaining the current federal funds rate. Given the recent inflation data, a resilient job market, and the influence of the new administration, the consensus believes the Fed will opt for a wait-and-see approach.

On Thursday, we will receive the 4Q 2024 gross domestic product (GDP) report and initial jobless claims. The GDP report will provide insight into the overall economic growth, helping market participants gauge the strength of the economy. Meanwhile, initial jobless claims will shed light on the health of the labor market, indicating whether layoffs are increasing or if employment conditions are stabilizing. Lastly, on Friday, the Personal Consumption Expenditure (PCE) Index and Chicago PMI data will be released. The PCE data is crucial for understanding inflation trends, as it is the Fed’s preferred measure of price changes. Meanwhile, the Chicago PMI will provide insights into manufacturing activity in the region. These indicators will be essential for gauging inflationary pressures and overall economic momentum, influencing market sentiment and expectations for future Fed actions.

1Kessel, Andrew. “Netflix Stock Pops on Higher Revenue Outlook, $15B Buyback Boost.” Investopedia, January 22, 2025. https://www.investopedia.com/netflix-earnings-q4-fy-2024-8777613.

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 | January 21st, 2025

by | Jan 21, 2025 | Market Commentary

Market Commentary | January 21st, 2025

Week in Review…

Major market indices concluded the week with positive returns, while the Treasury yield began its descent from its historical uptrend. A drop in the Treasury yield typically indicates heightened demand for safer investments, often reflecting investor concerns about economic growth or market volatility.

  • The S&P 500 closed up 2.91%
  • The Dow Jones Industrial Average was higher, up 3.69%
  • The tech-heavy Nasdaq rose, up 2.85%
  • The 10-Year Treasury yield concluded at 4.62%

Last week we received three key reports—Producer Price Index (PPI), Consumer Price Index (CPI), and retail sales— which provided insights into inflation and consumer behavior.

The week began with the release of the PPI on Tuesday, which showed a 3.3% increase year-over-year for 2024. Notably, PPI inflation has been accelerating, running at an annualized rate above 3% over the past three months. While the PPI measures price changes at the producer level, it doesn’t directly capture the inflation consumers experience at stores and restaurants. For that, markets turned to Wednesday’s CPI release.

The CPI report was the highlight of the week. Core CPI, which excludes volatile food and energy prices, rose 0.2% month-over-month, below the 0.3% estimate. On an annual basis, core inflation rose to 3.2%, also under the forecasted 3.3%. This softer-than-expected inflation data sparked optimism in financial markets, with the major indices recording their best daily performance since November. The bond market also rallied, with the 10-year Treasury yield dropping by 15 bps from the day prior. Investors interpreted the report as a sign that inflation pressures may be easing, increasing the likelihood that the Federal Reserve could hold off on further interest rate hikes.

Thursday’s retail sales report showed a 0.4% increase in December, slightly below expectations. However, the data still pointed to resilient consumer spending, suggesting that holiday shopping remained robust despite higher interest rates. This resilience provides a key support for the broader economy as consumer spending accounts for nearly 70% of gross domestic product (GDP).

Spotlight

The Financial Fallout of Revenge Buying: A Deep Dive into Consumer Debt

Revenge buying refers to the surge in consumer spending that occurs after a period of restricted shopping opportunities, such as during lockdowns or economic downturns. This phenomenon was notably observed after the COVID-19 pandemic, when people, eager to make up for lost time, began splurging on luxury items and non-essential goods.

While revenge buying can provide a temporary boost to the economy, it often leads to significant financial challenges for consumers. Many individuals turn to credit cards to fund their purchases, resulting in mounting debt. According to The Wall Street Times, the total amount owed for credit card debt in the U.S. is surpassing $1 trillion. This surge in debt is exacerbated by high interest rates, making it increasingly difficult for consumers to manage their finances.

The consequences of this trend are severe. Defaults on credit card payments have skyrocketed, with many Americans struggling to keep up with their monthly bills. As stated by WalletHub, the average household credit card debt is now over $10,000, putting immense pressure on families and individuals. High-income households may be able to weather this storm, but lower-income consumers are particularly vulnerable, often finding themselves with zero savings and high levels of financial stress.

Consumer spending is a critical driver of the U.S. economy, accounting for nearly 70% of the GDP, according to The Wall Street Times. When consumers engage in revenge buying, it can initially boost the stock market, particularly in sectors like retail, technology, and consumer discretionary. Companies in these sectors often see higher revenues and profits, which can lead to increased stock prices.

However, the long-term effects can be more complex. As consumers rack up credit card debt and struggle to make payments, their financial instability can lead to reduced spending in the future. This reduction in consumer spending can negatively impact corporate earnings, causing stock prices to fall. Additionally, high levels of consumer debt can lead to increased defaults, which can create broader economic instability and affect investor confidence.

Investors may also become more cautious, shifting their focus to safer assets like bonds or gold, which can lead to volatility in the stock market. The bond market can be particularly sensitive to changes in consumer spending, as high spending can lead to inflationary pressures, prompting the Federal Reserve to raise interest rates. Higher interest rates can decrease bond prices, as new bonds are issued with higher yields.

While revenge buying reflects a desire to reclaim normalcy and indulge after periods of deprivation, it can lead to significant financial strain. The resulting credit card debt and associated struggles highlight the need for better financial planning and awareness among consumers. The stock market and investing landscape are also affected, with potential short-term gains followed by long-term risks.

Week Ahead…

This week will be a shorter trading week than normal due to the Martin Luther King Jr. Day holiday on Monday, closing the market for the day. Despite this, there are still a few key economic reports to watch. Below are some important topics to monitor throughout the week:

Treasury Auctions: This week, the U.S. Department of Treasury will auction 20-year bonds and 10-year Treasury Inflation-protected Securities (TIPS) notes. The long end of the yield curve is primarily influenced by supply and demand rather than monetary policy. Consequently, long-term inflation expectations play a significant role in determining long-term yields. Additionally, the 10-year TIPS auction will allow markets to assess 10-year breakeven rates, a crucial indicator of inflation expectations that provides insights into future inflation and its potential impact on investment returns.

Housing: On Friday, the National Association of Realtors will release the December Existing Home Sales and the month-over-month percentage change in Existing Home Sales. These reports offer insights into the housing market’s strength and, by extension, the overall economy. The previous report (November 2024) exceeded expectations. Another positive surprise would indicate continued economic and consumer strength, especially considering the headwinds from rising interest rates for 30-year mortgages, which started the month at around 6.69% and ended at approximately 6.91%.

Survey Data: S&P Global will release the Services and Manufacturing Purchasing Managers Index (PMI) on Friday. Both indices are vital indicators of overall economic health and future GDP prospects. However, given the significant contribution of services to U.S. GDP, the performance of the Services PMI will have a greater market impact. The Services PMI did not exceed forecasts in the last report, so markets will be keen to see if this trend continues. Meanwhile, the Manufacturing PMI has been hovering near contractionary territory in recent reports, and markets will be watching to see if conditions improve or worsen.

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.

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