Market Update: January 27, 2025
In a shortened quiet week for economic releases, data included gains in existing home sales, while the leading index of economic indicators declined, as did consumer sentiment.
Equities gained, especially abroad along with a weaker U.S. dollar as fears of tariffs were dampened a bit after the inauguration. Bonds were little changed domestically, but some foreign bonds fared well with a weaker dollar. Commodities were mixed, with declines in oil.
U.S. stocks fared positively, to more record highs for the S&P 500, on a market week shortened by the MLK holiday and also included the U.S. Presidential inauguration. By sector, leaders included gains of 4% for communications services and 3% for health care, followed by technology and industrials, while energy ended up as the only down sector, with a decline around -3%. Real estate gained over a percent, despite slightly higher interest rates. Per FactSet, 16% of S&P 500 companies have reported earnings, with blended (actual plus expected) 4th quarter year-over-year earnings growth at 12.7%, about a percent higher than it was at year-end and a few tenths higher than the prior week. There is much more to come on the earnings front over the next few weeks.
In the President’s opening inaugural remarks, and later executive orders, a key focus on the financial side was the speed and severity of any applied tariffs; however, markets were pleased that a measured approach is being taken, with reports that the administration is taking a deeper dive into tariff effects before action is taken. Early comments were less hawkish than feared (even about China), leaving the door open for more nuanced negotiations as opposed to broader ‘universal’ tariffs immediately. Tariff rates of 25% on Canada and Mexico were alluded to, although the same were threatened in 2019, but not ultimately imposed. Also notable and expected were restrictions on energy, including oil/gas drilling being lifted. Mid-week, markets were also enthused by project ‘Stargate,’ a $500 bil. artificial intelligence-focused initiative (positive AI-related news has been an easy jumpstart for markets in recent quarters).
Foreign stocks experienced one of their best weeks in some time, outperforming domestic stocks by several percent, along with a sharp decline in the value of the U.S. dollar. Japan and Europe outperformed the U.K. and emerging markets. Sentiment was directly related to the lack of immediate tariff announcements, in favor of more measured assessments, slight economic growth improvements in Europe, as well as strong hints of ECB interest rate easing, in that “a gradual move is certainly something that comes to mind at the moment.” This offset some labor weakness and continued inflation pressures in the U.K. The Bank of Japan hiked policy interest rates by 0.25% to around 0.50%, the highest level since 2008. While hikes are expected to continue slowly, overall rates remain low, yet through a yield curve that also appears more normal than it’s looked in some time.
Bonds in the U.S. markets were little-changed, along with minimal change across the U.S. Treasury yield curve, which is now positively-sloped and relatively normal looking. High yield slightly performed investment-grade corporates and Treasuries. Foreign unhedged/local currency bonds fared best, along with a sharp decline in the value of the U.S. dollar index for the week, while hedged bonds were little changed.
Commodities were mixed for the week, with gains in agriculture and precious metals offset by weaker energy and industrial metals. Crude oil prices fell over -3% last week to $75/barrel, following a proclamation by the new President that oil prices (along with interest rates) “must come down.” He obviously doesn’t have the power to do that unilaterally but could indirectly incent other policies to make it happen, such as easing the way for more production. The implications of the President’s loosening of energy drilling restrictions add more complexity to an already complex global oil market, but adding more potential supply to an already high-producing and well-supplied U.S. oil market could be read as potentially bearish for pricing. (Lower oil prices have tended to be positive for the economy and consumers as a whole, but less welcome for the specific energy and commodity sectors.) However, this doesn’t include any offsetting global supply factors, such as production from Iran and Russia, or changes in demand.
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.