Market Update: January 21, 2025
Economic data included the positive news of consumer and producer price inflation coming in softer than expected, while industrial production and housing starts also saw strong gains for the month. Also, retail sales increased, albeit to a lesser degree than hoped.
Equities gained around the world, as markets celebrated tempered inflation results, causing a drop in long-term yields. Bonds fared well for the same reason of lower rates. Commodities gained, with hopes for stronger demand and some supply concerns.
U.S. stocks reversed back upward last week, as markets celebrated the Wed. CPI report, which was still sticky, but a bit cooler than expected, which drove down long-term yields. Sentiment also appeared to be helped by the Israel-Gaza ceasefire agreement, which lowers the temperature in the Middle East.
Value strongly outperformed growth, with every S&P 500 sector ending positively, and small caps outpacing large caps. Leading were cyclicals energy, materials, and financials, each up over 6% for the week. For the latter, as earnings season started, strong reports in financials drove prices higher for JPMorgan, Goldman Sachs, Citigroup, and Wells Fargo, among others. Defensive consumer staples and health care brought up the rear with minimal gains. Real estate also gained nearly 5% as interest rates came back down sharply. Financials started off earnings season, with big banks performing strongly, with stronger net interest margins (from higher interest rates) as well as hopes for an easier regulatory environment in the coming administration.
Earnings season for Q4-2024 has begun, with FactSet estimating a 12.5% growth rate for the quarter (including 10% of S&P 500 firms having reported, the rest being expectations), down a bit from a few weeks ago, but a significant improvement from Q3. Leadership is expected in financials (improvement on net interest margins, related to interest rates), in addition to ongoing strength for communications services, technology, and consumer discretionary. Energy is expected to bring in the rear, with an anticipated -25% earnings decline, related to oil price volatility over that period.
Foreign stocks saw similar gains to those in the U.S., with Europe outgaining the U.K., Japan, and emerging markets. The U.K. saw inflation slow to 2.5%, which was welcome, but it was offset by flattish economic growth there, and the second straight year of negative GDP growth in Germany—the combination of which provides a better backdrop in the region for central bank rate cuts. On the other hand, hawkish language from bankers in Japan pointed to a stronger likelihood of rate hikes in coming meetings. Within EM, Chinese stocks rose nearly 6% to lead the way, as 4th quarter GDP and industrial production came in better than expected. As sentiment for Chinese equities has been quite poor, any signs of catalysts showing ‘better’ than ‘bad’ have been cause for some degree of jubilation.
Bonds gained about a percent, both for investment-grade and high yield, as interest rates fell back by 0.10-0.15% along the longer end of the yield curve, in keeping with contained CPI inflation results. Floating rate bank loans earned positive but muted returns, as expected. A slight decline in the value of the U.S. dollar halted the weakness in foreign bonds, which also saw similar strong gains for the week. In an example of how conditions and sentiment have shifted, 30-year Chinese bond yields fell below 30-year Japanese yields, a condition considered unthinkable just a few years ago.
Commodities rose across the board, led by industrial metals, although precious metals, energy, and agriculture also gained about a percent each. Crude oil rose nearly 2% last week to $78/barrel, with offsetting influences of the Gaza ceasefire agreement calming risk premiums and more sanctions on Russia threatening global supplies.
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.