Market Update: January 14, 2025

Economic data for the week included ISM services continuing to improve into solid expansion and an employment situation report for December that came in far stronger than expected.

Equities fell back, along with the positive economic news pointing to less Fed policy easing action. Bonds accordingly fell as long-term interest rates rose ever higher. Commodities fared positively, with gains in all major groups.

U.S. stocks fell back as higher interest rates continued to weigh on sentiment, with small caps now having reached -10% correction territory since late November, while large caps have held on significantly better. The week was shortened by the Thur. market closure to commemorate former President Carter. From over the weekend into Monday, reports surfaced that incoming President Trump had plans to ‘pare back’ tariff levels relative to what had been announced during the campaign (causing a drop in the value of the U.S. dollar), although he refuted these same claims, resulting in further volatility. As ISM services, JOLTs, and non-farm payrolls came in stronger than expected, it ended up being a ‘good news is bad news’ dynamic yet again, as that points to a path of the Fed moving at a slower easing path that was earlier hoped. This is especially true, as continued sticky inflation remains a wildcard. As seen by recent consumer sentiment results, plenty of speculation is swirling around possible worst case scenarios surrounding foreign trade policy this year, such as maximum tariff levels across the board, as opposed to a political likelihood of more tempered actual policy. How closely draft political policy morphs into reality will be unveiled over the next several months.

By sector, energy, health care, and materials were the only positive sectors for the week, while the downside was led by technology, financials, and consumer discretionary. Real estate also fell by -4% along with the higher interest rates. New export rules from President Biden weighed on popular chip stocks. Earnings season began in earnest Fri., with reports for Q4 rolling in over the next several weeks, which could also add to market volatility, although forecasts overall are quite good (estimate for the S&P 500 of nearly 12% year-over-year earnings growth, per FactSet).

Foreign developed market stocks ended positively in local terms, but a stronger U.S. dollar turned these negative for the week. Gains in Europe were offset by sharp declines in Japan and emerging markets. Concerns in Japan continue to be centered on the timing and magnitude of the BOJ’s expected monetary tightening policy. In Canada, Prime Minister Trudeau resigned, after a nine-year run, after a bout of recent growing unpopularity, which appears to be increasingly common with incumbent administrations around the globe, particularly as fiscal stresses are rising to the surface. In EM, Chinese stocks fell by over -4% as year-over-year inflation came in at 0.1%. While such a result might have been briefly cheered in the U.S. and Europe, levels this low border on deflation, as a byproduct of very slow consumer activity there that’s been difficult to kickstart.

Bonds fared poorly last week, with the 10-year U.S. Treasury closing at nearly 4.8%, after having reached a high for the past year during the week, and the 30-year at a rounded 5.0%. The curve has solidly un-inverted from both the 10y-3m and 10y-2y measures, with the spike in long rates having outdone the sticky short rates. Floating rate bank loans fared best with flattish results, while Treasuries and investment-grade corporate indexes each fell just shy of a percent. Foreign bonds were held down by the stronger dollar and rising rates of their own.

U.K. 30-year gilt yields reached their highest levels in over 25 years (to over 5.3%), with higher-than-expected inflation readings, weaker economic growth (concerns over stagflation), fiscal policy, and potential foreign trade effects (with the U.S.) looking ahead. This type of rising rate scenario is what some have worried about for the U.S., although having the world’s reserve currency (resulting in a strong U.S. dollar), ability to issue higher levels of debt that’s readily absorbed by global markets, and a more diversified economy generally has kept these concerns at bay domestically so far. Smaller and moderately-sized economies have fewer tools at their disposal to offset internal and external effects, not to mention a more limited market for their debt, hence the added ‘credit spread’ that higher yields imply.

Commodities rose across the board last week, with energy and metals sharing leadership, with each group up a few percent each. Crude oil rose nearly 3% last week to $77/barrel, with a conflux of seasonal demand and tighter supplies, but mostly due to the Biden administration announcement Friday of broader sanctions on Russia’s energy complex, that targeted producers, shippers, traders, and insurers, which will likely also weigh on global supplies. Natural gas spot prices rose by 8% last week, with added cold temperature forecasts across the U.S. in a peak usage period. Earlier in the week, the U.S. administration also permanently banned offshore drilling for over 600 mil. acres of the Pacific and Atlantic Oceans, which could require Congressional action to undo, and reducing potential long-term supply.

The information above has been obtained from sources considered reliable, but no representation is made as to its completeness, accuracy or timeliness.  All information and opinions expressed are subject to change without notice.  Information provided in this report is not intended to be, and should not be construed as, investment, legal or tax advice; and does not constitute an offer, or a solicitation of any offer, to buy or sell any security, investment or other product.