Weekly Market Report: January 17th, 2025

Market Anecdotes

• Economic data last week generally served to cool the ‘no landing’ scenario with data reflecting moderating core services inflation, reinforcing notions of a cooling labor market and taking Fed policy expectations back toward where they were prior to last week’s jobs report. 
• The rise in interest rates since mid-September is a key market dynamic at this time and last week provided some much needed respite from the more recent leg higher since December 6th.
• Corporate earnings kicked off last week with Q424 expectations at 7.3% alongside downwardly revised but still robust 2025 quarterly growth of Q1 11.2%, Q2 9.4%, and Q3 12.7%. 
• An illustration from The Daily Shot painted a helpful illustration of U.S. equity category valuations reinforcing expensive headline and momentum indices countered by cheap small caps.
• An additional valuation note last week by Alpine Macro highlighted the U.S. equity risk premium currently near a 23 year low which speaks to the relative attractiveness of the S&P 500 to U.S. Treasury bonds.
• Forces underpinning the strong USD include relative global growth dynamics, a less aggressive Fed easing cycle, rising USD market-based bond yields, geopolitical risks, and overall bullish sentiment surrounding the USD.
• BCA noted the increase in UofM survey data on consumer inflation expectations was not reinforced by the NY Fed consumer survey on inflation where forward expectations were much more muted.

Economic Release Highlights

• December YoY headline (2.9% vs 2.9%) and core (3.2% vs 3.3%) CPI alongside MoM readings of headline (0.4% vs 0.3%) and core (0.2% vs 0.3%).

• PPI in December came in slightly softer than forecast with headline and core MoM readings of 0.2% and 0% respectively. YoY readings of 3.3% and 3.5% were in line with expectations. 

• Headline Retail Sales for December were slightly weaker than expected (0.4% vs 0.6%)

• NFIB Small Business Optimism Index improved to 105.1, a notable move higher from November’s 101.7 reading and above the spot consensus.

• The January NAHB Housing Market Index came in higher than expected (47 vs 45) and improved from December’s level.

• December Housing Starts (+16% MoM) and Permits (-1% MoM) both beat expectations, offering a slightly more upbeat tone to housing market dynamics.

Weekly Market Report: January 10th, 2025

Equity markets subscribed to a ‘good news is bad news’ narrative last week with healthy corporate earnings projections and a strong labor market adding support to the strong growth / Fed pause narrative, pressuring yields to the upside and stock prices downward. Global equity markets, including the U.S. closed down 0.5% to 2% with growth stock underperforming value stocks on the week. Bond yields reached their highest levels since October 2023 with the 10yr closing at 4.77% while the USD (+0.64%) and commodities (+3.13%) both moved higher.

Market Anecdotes

• The question of when stocks will become sensitive to higher bond yields grew louder last week amidst a backdrop of a shift back toward negative stock/bond yield correlations. Ultimately, a mix of fundamentals and market perceptions of prevailing inflation dynamics will dictate.
• The U.S. labor market was in focus last week with the JOLT and Employment Situation reports. The U.S. economy has added over two million jobs in the past year but the average time it’s taking the seven million “unemployed but searching” group has grown from five months to six months.
• Strong labor market reports last week, particularly Friday, led to a surge higher in interest rates and corresponding consolidation in equity markets. Higher market-based interest rates, less aggressive monetary easing, and a strong USD are working to tighten overall financial conditions.
• The question of what is driving bond yields higher points to both inflation concerns and increasing growth expectations with the latter arguably factoring more so than the former.
• FOMC minutes released last week echoed a more cautious approach toward easing but an easing bias, nonetheless. They have ample company in that mindset with 70% of Global central banks easing over the past three months with aggregate rates 550 bps lower.
• We are at the doorstep of 4Q earnings season with the S&P forecasted to post 11.7% growth, which would be its strongest mark since Q4 2021. Based on historical beat rates (75%) and margins (6.7%), it’s likely we may see a number closer to 14%.
• Elevated interest rates and have pushed corporate bankruptcies to their highest level (by issuer #) since the GFC despite nearly twice as many credit situations being addressed out of court, according to Fitch.
• Leuthold noted, thanks to a top-heavy December, year-end 2024 marked the only instance on record where 5 companies had 4% or greater weights in the S&P 500. It had been 2 or 3 for most of the past 5 years, including a peak of three way back in the tech bubble.
• Bianco Research reiterated a word of caution putting any weight in seasonal trends like the “January Effect” by highlighting January’s rank since 1928 (3rd best), compared to since 2000 (worst).

Economic Release Highlights

• The December Employment Situation report for December showed 256k jobs, well above the spot consensus of 165k. The unemployment rate fell unexpectedly one tick to 4.1%. Average Hourly Earnings were in line with the forecast at 0.3% MoM and 3.9% YoY. 

• The November JOLT Survey reported 8.098M job openings, well ahead of the forecasted 7.650M and above the range of estimates (7.585M-7.800M).

• The ISM Services Index for December registered 54.1, ahead of spot consensus 53.2

• JP Morgan Global Composite (52.6) and Services (53.8) readings for December both came in slightly above consensus expectations.

• UofM Consumer Sentiment reading for January registered 73.2, slightly below the forecast of 74.5 and oneyear inflation expectations increased notably from 2.8% to 3.3%. Long-term inflation expectations also jump 0.3% to 3.3%.

Weekly Market Report: January 3rd, 2025

Last week bid adieu to 2024 and ushered in 2025 with New Years Day landing right in the middle of the week. The Santa Claus rally failed to materialize with the S&P 500, developed international, and emerging markets all closing down approximately 0.5% due in part to some underperformance across technology and consumer discretionary names. There were no impactful market events last week and trading volume was very thin as expected. Interest rates moved slightly lower on the week with the 10yr yields closing at 4.60%, maintaining the positively sloped yield curve for both 2y/10y and 3mo/10y spreads. Commodities benefited from a 4.8% rise in WTI crude oil, up nearly $4 to close at $73.96 and the USD continued to strengthen, closing up 0.88% for the week.

Market Anecdotes

• While a less aggressive Fed easing cycle may be contributing to cooling stock market momentum, we would highlight the three headed monster of interest rates, crude oil, and a strong USD as an equal, if not greater force.
• With interest rates possibly remaining elevated relative to the past 10 years, a look at long-term growth and value stock performance in higher interest rate environments suggests growth stocks outperform in lowrate environments while value stocks win in higher rate environments.
• Fed Funds futures markets are pricing the Fed on hold until May with a probability weighted 50bps by year end but carrying a relatively wide dispersion with left tail pricing down to 300-325 and right tail pricing of 450-475.
• The corporate earnings environment is expected to remain supportive with analysts seeing S&P 500 earnings growth improving from 9.4% in 2024 to 14.8% in 2025.
• Of note for 2025 is that earnings improvements for “the 493” are expected to improve from 4% in 2024 to 13% in 2025 while the “Magnificent 7” are expected to moderate from 33.5% in 2024 to 21.3% in 2025.
• Bespoke added a notable weak breadth observation that December 2024 saw the fewest positive breadth days (#adv/#decl) of any month since 1990 when they began compiling data.
• Bespoke noted that none of the “Mag 7” stocks made the list (Russell 3000) of the best performing stocks of 2024 which range from +350% to +2,684%. They also did not make the list of the worst performing stocks of 2024 which ranged from -85% to -99%.
• Some market consolidation on the back of extreme positive sentiment and a +25% year may be a welcomed and somewhat expected occurrence with investor sentiment cooling from late summer (and post-election) highs back into more healthy (skeptical) territory.
• A long-term look back at U.S. tariff rates shows the misguided protectionist policies of the early 1930’s, a slight resurgence in the 1960’s, and a steady to declining trend for decades leading up to 2018 with an uncertain path going forward.

Economic Release Highlights

• The ISM Manufacturing Index registered 49.3 in December, above both the spot forecast of 48.5 and the consensus range of 47.5 to 48.6. The final PMI Manufacturing Index was revised higher from 48.3 to 49.4.
• The J.P. Morgan Global Manufacturing PMI registered 49.6 for December.
• Chinese CFLP PMI (C,M,S) improved slightly to 52.2, 50.1, 52.5 with services and composite readings improving approximately two points and manufacturing sentiment maintaining its level.
• Case-Shiller Home Price Index rose 0.3% MoM in October for a YoY increase of 4.2%, both generally in line with expectations.
• Pending Home Sales for November rose 2.2%, above consensus of 0.9% and the forecast range of -0.1% to 1.0%.

Weekly Market Report: December 13th, 2024

Market Anecdotes

• 2024 is shaping up to close out with an impressive, albeit more common than one might think, outcome for equity markets characterized by concentrated earnings growth, top heavy performance, challenges for active management, and elevated valuations.
• Inflation dynamics were in focus last week with the CPI release and upcoming FOMC meeting. BLS methodology versus alternative measures again garnered significant attention when assessing underlying inflation dynamics, particularly with housing and wage growth.
• Last week was a blackout week for the FOMC but meetings from other central banks generated headlines with nearly 71% of major central banks now in easing cycles including last week’s ECB (-25bps), SNB (- 50bsp), BoC (-50bps), and the RBA (0bps) moves.
• Bond markets’ renewed focus on U.S. fiscal policy, inflation dynamics, and growth trends last week with interest rates drifting higher and the 10yr/3mo slope uninverting for the first time since July 2022.
• While China signaled intent to ramp up stimulus next year, monetary and credit data in November underwhelmed with new loan growth and total social financing coming in well below market expectations and M2 growth slowing from 7.5% to 7.1%.
• A consideration in early 2025 will be how DC ultimately decides to sequence legislative and executive priorities with the potential for vastly differing market reactions depending on the composition of tariffs, tax cuts, immigration reform, and deregulation initiatives.
• The Tax Foundation estimate of tariffs implemented in 2018, and maintained today, cost Americans approximately $80b/year and the baseline new tariff taxes would amount to a $1.2t tax increase over 10 years, reduce GDP by 0.45%, and cost U.S. workers 344,900 jobs.
• DC policy conversations surrounding federal agencies who acquire residential mortgages with both explicit and implicit federal guarantees are raising some interesting considerations regarding cost of capital, size of the guarantee pool, and mortgage product implications.

Economic Release Highlights

• CPI for November was in line with expectations for both headline and core with YoY readings of 2.7% and 3.3% and MoM readings of 0.3% and 0.3% respectively.
• Continuing Jobless Claims continued to edge higher last week while headline Weekly Jobless Claims surprised a bit to the upside (242k vs 220k) and came in above the consensus forecast range (190k to 225k).
• The November NFIB Small Business Optimism Index jumped from 93.7 to 101.7, well above the 94.5 consensus estimate.

Weekly Market Report: December 6th, 2024

Markets last week took in stride a relatively full economic calendar and some overseas political drama in Asia (South Korea), Middle East (Syria), and Europe (France). Upbeat narratives surrounding the holiday shopping season, renewed China stimulus sentiment, and measured cooling of the U.S. labor market translated to marginal gains across global equity markets with a narrow rally in the U.S. (+1%) and participation across both developed and emerging markets, both rising approximately 1.4%. Interest rates declined slightly with some curve flattening as short rates fell more than long rates. Commodities were relatively unchanged on the week with some weakness in oil/gas prices while the USD posted a marginal 0.30% gain for the week.

Market Anecdotes

• A new record high for the S&P 500 last week puts the headline index at a 28% gain for the year, a rally driven by large cap growth stocks but not one foreseen by most Wall Street strategists.
• Bespoke noted last week marked the two-year anniversary of OpenAI’s release of ChatGPT, a window where we’ve seen a remarkable boom in market caps, revenues, operating cash flows, and overwhelmingly unexpected earnings.
• The valuation gap created by small caps lagging large caps by 10% this year and 40% since the end of 2019 prompted a Furey Research Partners research note highlighting the strong historical probability (96%) of small caps outperforming large caps over the next five years.
• A new research piece from Robert Shiller titled “U.S. Crash Confidence Index” indicated a very high level of investor comfort and complacency, a cautious narrative amidst the current backdrop of record high equity markets.
• The market’s reaction to Friday’s jobs report may have been more focused on prior month revision announcements than the headline number given hurricane and strike related disruptions in the October report.
• A flurry of Fed speeches last week in advance of the blackout period echoed sentiments surrounding stubborn inflation sticking above target and tight but cooling labor markets.
• The U.N. FAO reported global YoY food prices up 5.7%, a concerning development for global stability as well as the consumer in general who experience food prices much differently than the simple year over year growth rate we monitor as investors.
• OPEC last week decided for a third time to push back unwinding production cuts to April of next year citing market fundamentals and likely the specter of U.S. production capabilities.
• A political crisis unfolded in South Korea last week with President Yoon targeting the opposition by declaring a crisis and attempting to instill martial law. Korea joins Russia-Ukraine, internal conflict in Syria, Israel-Iran armed conflict, and China-U.S. trade in the geopolitical risk landscape

Economic Release Highlights

• October Payrolls beat consensus (227,000 vs 211,000) while the Unemployment Rate increased to 4.2%. Average Hourly Earnings came in slightly ahead of forecast with MoM 0.4% vs 0.3% and YoY 4.0% vs 3.9%.
• The October JOLT Survey reported 7.744M openings, above the spot forecast (7.490M) and consensus range (7.287M to 7.550M) with a vacancy rate unchanged at 4.6%. The quits rate moved higher overall but remained steady in the private sector.
• The November ISM Manufacturing Index came in slightly above forecast (48.4 vs 47.6). The ISM Services Index came in below the spot forecast (52.1 vs 55.5) and range of estimates (54.0-57.5).
• The November JPM Global Manufacturing PMI improved slightly from 49.4 to 50.0 while the Services reading stayed at 53.1. The Composite reading climbed one tick to 52.4.
• The UofM Consumer Sentiment Index registered 74.0, slightly above the spot forecast while one-year forward inflation expectations increased from 2.6% to 2.9%.