Market Commentary | February 3rd, 2025

by lportee53 | 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:

Job Creation: The initiative is projected to create over 100,000 new jobs, providing an immediate boost to employment and consumer spending.
Infrastructure Investment: The massive $500 billion investment over four years will stimulate economic activity in construction, supply chain, and supporting industries.
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.
Global Competitiveness: The project aims to enhance U.S. dominance in AI technologies, attracting global investment and talent.
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.
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.
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:

Funding Uncertainty: While the initial commitment is $100 billion, the source of the full $500 billion funding remains unclear.
Geopolitical Implications: The involvement of foreign investors could raise questions about national security and technology transfer.
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 lportee53 | 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.¹Major 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 lportee53 | 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.

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 13th, 2025

by lportee53 | Jan 13, 2025 | Market Commentary

Market Commentary | January 13th, 2025

Week in Review…

Major market indices ended the week lower over concerns surrounding rising inflation:

The S&P 500 closed at -1.94%
The Dow Jones Industrial Average was lower at -1.86%
The tech-heavy Nasdaq fell to -2.34%
The 10-Year Treasury yield concluded at 4.77%

Inflation remained a significant theme this week. The ISM Services Purchasing Managers Index (PMI) for December surpassed expectations at 54.1, indicating a robust expansion in the services sector. However, a notable driver of this increase was the ISM Non-Manufacturing Prices index, revealing higher input costs for service providers. This suggests that inflationary pressures may be persisting. The bond market reacted negatively to this news, with the 10-year Note Auction climbing to 4.68% and the 30-year Bond Auction rising to 4.913%. The University of Michigan Inflation Expectations survey reinforced these concerns, showing both 1- and 5-year expectations significantly higher than anticipated.

Several labor reports last week pointed to a strong economy. The Job Openings and Labor Turnover Survey (JOLTS) report for November showed a higher-than-expected 8.098 million openings, indicating continued labor demand. This trend was further supported by lower-than-expected initial and continuing jobless claims. Friday brought more positive labor market news, with Nonfarm Payrolls adding 256,000 jobs in December, exceeding expectations by a significant margin. The unemployment rate also dipped to 4.1% from 4.2%.

Given this week’s data, market participants appear less optimistic about the Federal Reserve lowering interest rates. The persistence of inflationary pressures raises concerns about the potential for reigniting inflation, making the market less certain about the Fed’s ability to cut rates.

Spotlight

Initial Look at Investment Impact of the California Fires

The recent wildfires in California have had a devastating economic impact. Preliminary estimates suggest that the total damage and economic loss could range between $135 billion and $150 billion. This makes the current wildfires potentially the costliest in U.S. history, surpassing previous records. In this week’s spotlight, we look at the initial investment impact for investors regarding the fires.

Equity and Debt Concerns

The recent wildfires in California have significantly impacted insurance companies, leading to substantial insured losses. Some insurance companies have tried to mitigate their risk and avoid certain areas. For instance, State Farm dropped around 1,600 policies in Pacific Palisades before the fires, reflecting a broader trend of insurers pulling back from high-risk areas. Allstate and Farmers Insurance have also halted underwriting in certain regions of California, leaving many homeowners relying on the California FAIR Plan (FAIR Plan).

The financial strain has led to increased premiums and stricter underwriting practices for those willing to still insure. Those with exposure to the current fires such as Mercury Insurance and Allstate have seen their stocks drop significantly due to the fires. Additionally, the state has implemented a one-year moratorium on the cancellation or non-renewal of homeowners insurance policies in affected areas to provide some relief which could lead to longer term effects for those with exposure.

Within the insurance market, concerns around catastrophe bonds (cat bonds) have fortunately been minimal. Cat bonds are financial instruments used by insurers to transfer the risk of catastrophic events, like wildfires, to the capital markets. Approximately 12% of the $50 billion cat bond market is currently exposed to wildfire risk. Despite the recent wildfires in California, many cat bonds are expected to be minimally affected because they often bundle fire risk with larger perils like hurricanes. However, there is still concern that subsequent natural disasters could trigger losses, especially if cumulative loss thresholds are reached. In the marketplace, investors are also demanding higher interest payments to compensate for the increased risks posed by climate change and rising property values.

Municipal Market Concerns

Like many other states, California offers a public insurance option for homeowners. The FAIR Plan acts as the insurer of last resort for homeowners who can’t secure coverage in the private market, particularly in wildfire-prone areas. Funded primarily by policyholder premiums, the FAIR Plan can also request financial support from the California Infrastructure and Economic Development Bank (IBank) through bond issuance. The recent wildfires have increased pressure on the FAIR Plan, resulting in higher premiums and greater demand for coverage. IBank assists by issuing bonds to ensure the FAIR Plan has sufficient funds to meet its claims obligations. Additionally, IBank invests in wildfire risk reduction and disaster relief programs to help mitigate the impact of wildfires. As of June 30, 2023, IBank has issued a total of $52.5 billion in bonds, highlighting its significant role in financing public and private projects.

Investment Impact

While data specific to capital needs from IBank to FAIR Plan is not available, investors with exposure to California municipal bonds should take additional due diligence to their holdings to understand their potential exposure to IBank. Additionally, investors in municipal bond mutual funds and ETFs should pay attention as California is typically one of the largest state exposures in these types of funds. With wildfire concerns, there could be a drop in most CA municipal bond names as investors continue to reassess the risk of not just the current effect of municipalities but of the entire state.

In regard to equity and debt concerns, investors should understand their exposure to both the insurance and reinsurance market within their portfolios. Along with equity exposure, investors should also look at any catastrophe bond exposure they may have in their fixed income holdings, specifically within certain income focused mutual funds and ETFs. While exposure in most funds may be limited currently, if bond traders can demand higher coupons on these bonds, we may start to see exposure to these bonds increase within core-plus and multi-sector bond funds focused on income.

Week Ahead…

This week, several key economic indicators are set to be released, providing valuable insights into the current state of the economy. One of the most anticipated reports is the Consumer Price Index (CPI), which measures the average change in prices paid by consumers for goods and services. This report is crucial for understanding inflation trends and how they might impact purchasing power and the cost of living. Additionally, the Consumer Inflation Expectations report will be released, offering insights into how consumers perceive future inflation, which can influence spending and saving behaviors.

Another important indicator to watch is the Retail Sales Data. This report will show the total receipts of retail stores, offering a glimpse into consumer spending habits. Strong retail sales can indicate a healthy economy with confident consumers, while weaker sales might suggest economic challenges or shifts in consumer behavior. Alongside this, the Producer Price Index (PPI) will be released, measuring inflation at the wholesale level. This index reflects the average change over time in the selling prices received by domestic producers for their output, providing a broader view of inflationary pressures in the economy.

Additionally, the unemployment claims report will be released detailing the number of individuals who filed for unemployment insurance for the first time. This data is a key measure of the job market’s health and can signal changes in employment trends. The Industrial Production report will measure the output of the industrial sector, including manufacturing, mining, and utilities, providing insights into the overall industrial activity. The Crude Oil Inventories report will also be released, indicating the weekly change in the number of barrels of commercial crude oil held by U.S. firms, which can impact oil prices and broader economic conditions.

Lastly, the housing starts report will indicate the number of new residential construction projects that have begun during the month. This is an important indicator of the housing market’s health and can reflect broader economic conditions. Together, these indicators will offer a comprehensive snapshot of economic health and trends across various sectors.

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.

Weekly Market Commentary | January 6th, 2025

by lportee53 | Jan 6, 2025 | Market Commentary

Weekly Market Commentary | January 6th, 2025

Week in Review…

Major U.S. equity indices were mostly lower this week after finishing 2024 with double-digit annual gains. For the week ending January 3, 2025:

The S&P 500 closed down -0.48
The Dow Jones Industrial Average declined by -0.60%
The tech-heavy Nasdaq fell -0.51%
The 10-Year Treasury yield concluded at 4.59%

Initial jobless claims fell to an eight-month low of 211,000 in the week ending December 28, 2024, down from 219,000 in the previous week. This decrease, along with a drop in continuing claims to 1.84 million, suggests a resilient labor market.

The National Association of REALTORS® reported that pending home sales rose by 2.2% in November 2024, marking the fourth consecutive month of increases. This growth, exceeding the forecast of 0.9%, indicates a potential rebound in the housing market. Year-over-year, pending home sales increased by 6.9%, with improvements across all four U.S. regions.

The Institute for Supply Management (ISM) reported a Manufacturing Purchasing Managers Index (PMI) of 49.3, which was slightly higher than the previous reading but still indicating contraction. The S&P Global Manufacturing PMI for December 2024 came in at 49.4, surpassing expectations but below the prior reading.

The Atlanta Fed’s GDPNow model estimates fourth-quarter 2024 real GDP growth at 2.4%, a slight decrease from its previous projection of 2.6% on January 2, 2025.

Spotlight

A Resilient 2024 – In the Rear View Mirror

Equity markets performed strongly in 2024, driven by economic growth and solid corporate earnings, particularly in the technology sector. Fixed income saw modest gains, with leveraged loans, high-yield bonds, and asset-backed securities demonstrating strong performance against the backdrop of a robust economy. Inflation remained a persistent concern throughout 2024. The Federal Reserve cut interest rates three times, shifting to a more accommodative stance to support economic stability amid cooling inflation.

Economic Highlights

Inflation remained a persistent concern in 2024, with U.S. headline inflation at 2.7% in November, above the Fed’s 2% target. In response, the Federal Reserve implemented three 25 basis point rate cuts, bringing the federal funds rate to 4.25%-4.5% by December, while projecting only two rate cuts for 2025.

The 10-year Treasury yield, a key economic indicator, fluctuated throughout 2024, starting below 3.9% and ending at 4.57%. Geopolitical tensions in Israel and Ukraine had a modest impact on capital markets, contributing to the dollar’s safe-haven status and influencing investor sentiment.

The U.S. dollar showed strength in early 2025, continuing its robust performance from 2024. Its strength was also partly attributed to the Fed’s stance, interest rate differentials, and expectations surrounding President-elect Trump’s pro-growth policies. Despite these challenges, the U.S. economy demonstrated resilience, with GDP growth reaching 3.1% in the third quarter of 2024.

Broad Asset Class Performance

In 2024, Gold, Large Cap Core equities, and Global Equities emerged as top performers. U.S. Bonds underperformed, while Commodities, represented by the S&P GSCI, rallied in the fourth quarter. This rally was driven by gains in industrial metals, gold, and various agricultural commodities. U.S. real estate investment trusts (REITs) lagged behind the broader market in the last quarter of the year.

Equity Markets

Broad Equity Markets

For 2024 and Q4 2024, Growth outperformed Core and Value, while U.S. Equities (represented by the Russell 3000) outperformed International Equities and Emerging Markets and (represented by MSCI EM and MSCI EAFE) on a Total Return basis (24.51% versus 7.50% versus 3.82%).

This outperformance was driven by the continued dominance of large tech companies, higher liquidity in the U.S. market, and faster earnings growth of U.S. companies compared to global counterparts. Notably, in Q4 2024, Mid Cap Growth (represented by Russell Mid Cap Growth) outperformed both Large Cap Growth and Small Cap Growth (8.14% versus 7.07% versus 1.70%).

S&P Equity Sectors

Communication Services, Financial Services, and Consumer Discretionary sectors emerged as the top performers for both the full year and the fourth quarter of 2024. The Communication Services sector delivered an impressive ~34% gain on a total return basis in 2024, significantly outpacing other sectors, primarily driven by strong investor interest in mega-cap tech companies and the advancements in artificial intelligence (AI) technologies. However, the Technology sector continues to outperform the other equity sectors on a trailing 5-year total return basis.

Fixed Income

Yield Curve and Corporate Spreads

The U.S. Treasury yield curve was deeply inverted at the start of 2024 with short-term rates exceeding long-term rates. However, as the year progressed and towards the year end, the yield curve began to normalize slightly as long-term yields increased relative to short-term yields. This shift reflected market expectations for a more supportive monetary policy environment and reduced recession concerns.

Corporate credit spreads across all segments—including high yield bonds, investment-grade bonds, and leveraged loans—remained relatively stable throughout the fourth quarter of 2024. However, these spreads tightened significantly over the trailing 12-month period. This compression was due to improved risk appetite, expectations of continued economic growth, and anticipation of a supportive monetary policy environment.

Fixed Income Sectors

In 2024 and Q4 2024, leveraged loans, high-yield bonds, and asset-backed securities demonstrated strong performance, as reflected by their respective indices. The Morningstar Leveraged Loan LSTA TR index returned 8.95%, outpacing the Barclays US High Yield Very Liquid index at 7.66% and the ICE BofA ABS TR index at 5.93%. The strong performance of these riskier fixed-income assets can be attributed to factors such as expectations of Fed rate cuts, improving economic outlook, and investors’ search for yield in a changing rate environment.

Week Ahead…

Next week, employment data will be a key focus for investors. Several crucial economic reports will be released, providing insights into the labor market. On Tuesday, the Job Openings and Labor Turnover Survey (JOLTS) report will be released, followed by the ADP Nonfarm Employment Change report on Wednesday and Initial Jobless Claims on Thursday. However, Friday will be the most data-rich day, with the release of December’s figures for Average Hourly Earnings, Bureau of Labor Statistics Nonfarm Payrolls, Unemployment Rate, U6 Unemployment, and Participation Rate. It’s worth noting that initial jobless claims ended last year on a positive note, beating estimates for three consecutive weeks. Additionally, last month saw a divergence between ADP data and Nonfarm Payrolls, markets will monitor whether this discrepancy will persist.

On Friday, the University of Michigan will release four key consumer sentiment reports. The first two focus on consumer inflation expectations over one and five years. One-year expectations have recently remained within a narrow range of 2.6% to 2.8%, while five-year expectations have fluctuated between 3.0% and 3.2%. Markets will closely watch these figures for any signs of a shift in inflation expectations. The remaining two reports measure consumer expectations and overall sentiment. As the backbone of the economy, consumer confidence is a crucial indicator of economic activity. A positive surprise in these reports would bode well for both current and future economic growth.

Early next week, markets will focus on the service sector with the release of the S&P Global and ISM Services PMIs on Monday and Tuesday. As the U.S. economy is heavily reliant on services, these surveys will provide crucial insights into the health of the broader economy. A strong reading will likely boost confidence and support asset prices, while a weaker reading could raise concerns about economic growth.

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.