Weekly Market Update – January 10, 2025

Quick Takes

• Stocks have given up their gains in the early stages of the new year after a stronger-than-expected employment report spooked investors and sent yields higher. The S&P 500 fell 1.9%, the Nasdaq was down 2.3%, and the Russell 2000 dropped 3.5%.
• Yields on U.S. Treasurys jumped after the report, and for the week, the 10-year U.S. Treasury yield rose +16 basis points to close at 4.76%, its highest level since October 2023. The Bloomberg U.S. Aggregate Bond Index slipped -0.9% for the week.  
• Investors clearly didn’t like the rate implications of the strong jobs report and other solid economic data over the week, but it was good news for the economy. It shows that the labor market remains very resilient, and economic activity continues to be quite robust.

Source: Bloomberg. Data as of January 10, 2025.
Price Returns for Equity, Total Returns for Bonds.
* The term basis points (bps) refers to a common unit of measure for interest rates and other percentages in finance. One basis point is equal to 0.01%. Bond prices and bond yields are inversely related. As the price of a bond goes up, the yield decreases.

Strong jobs growth and economic data sank stocks and bonds

It was the third straight condensed trading week, with markets closed on Thursday for a national day of mourning for former U.S. President Jimmy Carter. When markets reopened on Friday, they moved back to a “Good News is Bad News” mode as inflation worries took over following a surprisingly strong employment report on Friday morning. The hot jobs report sparked a sharp selloff on Wall Street as traders feverously rushed to adjust to the likelihood of a higher rate environment in 2025. The economy added 256,000 new nonfarm payrolls in December, versus expectations for just 165,000, and the unemployment rate dipped to 4.1%. Until recently, markets were pricing in at least a few rate cuts from the Federal Reserve (the Fed) this year, but now are only expecting one or two cuts in 2025, with the first not expected to come until October now. Yields on U.S. Treasurys jumped after the report, and for the week the 10-year U.S. Treasury yield rose +16 basis points to close at 4.76%, its highest level since October 2023. The higher rate environment is pushing investors to recalculate their investment expectations as future profits become less valuable at a higher cost of capital. 

For the week, the S&P 500 Index was down -1.9%. The Nasdaq Composite Index, which is full of growth stocks – many of whose profits aren’t expected to be realized until further in the future, making them more rate sensitive – dropped -2.3% on the week. Smaller companies are also very rate-sensitive because much of their financing comes from floating rate debt, so the sharply higher expectations for rates hit them particularly hard. As a result, the small-cap Russell 2000 Index was a big laggard, falling -3.5% for the week. Of course, bonds don’t like higher rates either and the Bloomberg U.S. Aggregate Bond Index slumped -0.9% after a modest +0.2% rise the prior week. 

Though Wall Street didn’t like the rate reaction, there was a lot of good news for Main Street in the jobs report and other economic data over the week. It is suggesting that the labor market remains highly resilient and economic activity continues to be quite robust. On Wednesday afternoon, the Fed released the minutes from its December policy meeting and confirmed that committee participants believed they were “at or near the point at which it would be appropriate to slow the pace of policy easing” as the labor market holds strong, the economy shows strength, and inflation picks up. If inflation remained elevated, many Fed officials said the central bank could hold the policy rate steady or ease more slowly. But importantly, there was no mention of rate hikes.

The coming week will have a heavy focus on inflation with wholesale (PPI) and consumer (CPI) inflation reports on Tuesday and Wednesday, respectively. Import and export prices will also be reported on Thursday. The focus will also turn to the earnings season for fourth-quarter profits, which kicks off on Wednesday.

The Week Ahead

Inflation will be front and center for investors this week, beginning with the December 2024 Producer Price Index (PPI) on Tuesday and Consumer Price Index (CPI) on Wednesday. PPI is expected to come in at +0.4% for the month and +3.5% year-over-year. CPI is forecast to be +0.3% for December and +2.9% for the year ended December. Import and Export Prices will also be reported on Thursday. Any upside surprise to inflation data has the potential to sink markets, especially following the unexpectedly strong December employment report from Friday morning. 

Other economic data to watch next week include the National Federation of Independent Business’ (NFIB) Small Business Optimism Index for December on Tuesday and the Census Bureau’s Retail Sales report for December on Thursday. The Fed Beige Book on regional U.S. economic activity for December 2024 is released Wednesday afternoon. 

First-quarter earnings season also kicks off this week and will garner attention from investors. Earnings reports to watch next week will come from major U.S. financials on Wednesday, including BlackRock, Citigroup, Goldman Sachs, JPMorgan Chase, and Wells Fargo. Then Bank of America and Morgan Stanley report on Thursday. On Thursday Taiwan Semiconductor Manufacturing and UnitedHealth Group report.

Chart of the Week

The monthly Employment Situation report showed that new Non-Farm Payrolls (NFP) surged to 256,000 in December, up from 212,000 (revised lower from 227,000) the prior month. That handily beat Wall Street forecasts of 165,000 payrolls. October payrolls were revised higher to 43,000, up 7,000 from the prior estimate.  According to the Bureau of Labor Statistics report, Health Care added 46,000 jobs, Leisure and Hospitality grew by 43,000 new positions, and Government added 33,000 new positions. Health Care and Leisure and Hospitality were top contributors to November’s gains as well, along with Government jobs. The Unemployment Rate slipped to +4.1% from +4.2%, where it was expected to stay. The unemployment rate had been as low as +3.4% just 16 months ago but is near its three-year peak of +4.3% reached in July. Additionally, an alternative measure accounting for discouraged workers and those in part-time positions for economic motivations dropped to +7.5%, marking the lowest level since June 2024. Despite the strong job gains, wages grew slightly less than expected, with Average Hourly Earnings slipping to +0.3% from the prior month’s +0.4%, matching expectations. Year-over-year, Average Hourly Earnings also ticked down to +3.9% from +4.0% the prior month, where it was expected to stay. The Fed would like to see wage growth slow to around +3% annually or less, a level it sees as consistent with low inflation. Average Weekly Hours worked was unchanged at 34.3, matching expectations. Labor-Force Participation remained at 62.5%, in line with expectations. The strong December jobs report may keep the Fed from cutting rates at all in 2025. Following the report, market expectations for the first rate cut of the year was pushed back to October from May.

Monthly Job Creation in the U.S.

January 2022 – December 2024

Source: U.S. Bureau of Labor Statistics via FRED, CNBC.

Did You Know?

SPENDING HANGOVER– 36% of Americans took on debt this holiday season, with the average level of debt increasing +14.9% to $1,181. Of those who went into debt during the holidays, 42% regret spending as much as they did, but 59% expect to pay it off within four months. (Source: LendingTree)

SMALLER GROCERY BASKETS – Households with at least one GLP-1 user reduce overall grocery spending by 6% within six months. Out of 40 different categories, spending declined the most in savory snacks (11%), and the only sectors where spending increased were yogurt, fresh produce, meat snacks, and nutrition bars. (Source: Cornell SC Johnson College of Business)

ONLINE CONCERNS – When it comes to online activity, the two largest concerns among US consumers are identity theft and stolen credit card information. In 2024, identity theft was cited by 84% of consumers (up from 64% in 2023), while 80% of consumers cited stolen credit card information (up from 61% in 2023). (Source: Experian)

This Week in History

PANAMA PASSAGE – On January 7, 1914, the French ship Alexandre La Valley completed the first commercial passage through the Panama Canal, which shortened the shipping distance between New York and San Francisco by nearly 8,000 miles. (Source: The Wall Street Journal)

Economic Review

• The preliminary reading of the December University of Michigan Consumer Sentiment Index dipped to 73.2 from 74.0 the prior month, where it was expected to remain. The results were driven by improved conditions for buying Durable Goods. The Current Economic Conditions component jumped to 77.9, up from the prior month’s 75.1 reading, where it was expected to stay. The Consumer Expectations component, however, fell to 70.2 from 73.3 and was short of expectations for 72.7. One-year inflation expectations rose to +3.3% from +2.8%, which is where it was expected to remain. 5-10 year inflation expectations also increase to +3.3% from 3.0%. 
• The October Job Openings Labor Turnover Survey (JOLTS) showed Job Openings increased to a 6-month high of 8.098 million from 7.839 million the prior month (revised up from 7.744 million). That was well above expectations for 7.740 million. Job Openings peaked at 12 million in 2022, but companies have since cut back on hiring. Job openings rose the most in private education and accommodation and food services. Declines in hiring were seen in finance, real estate, and manufacturing. Job openings are an indication of the health of the labor market and the broader U.S. economy. The ratio of Job Openings to Unemployed Workers was unchanged at 1.1 and is down from a peak of 2.0 in 2022, and at the prepandemic level the Fed wants to see it at. The Number of People Quitting Jobs fell to 3.1 million from 3.3 million the prior month. The record was 4.5 million job quitters in late 2021. The Quits Rate fell to 1.9% from 2.1% the prior month. People tend to quit less often when the economy softens and jobs become harder to find. The Layoffs Rate remained at 1.1%, the same as the prior two months. The Hiring Rate slipped to 3.3% from 3.4%. 
• The ISM Services PMI rose to 54.1 in the final month of the year, up from 52.1% in November, above Wall Street expectations for a 53.5% reading. Service-oriented companies, such as retailers, banks, and hospitals, employ the majority of Americans. Numbers over 50% indicate economic expansion. The New Orders index increased to 54.2% from 53.7%. The Employment index slipped to 51.4% from 51.5%. The Production index rose to 58.2% from 53.7%. For services inflation, the Prices Paid index jumped to 64.4% from 58.2%, the highest level since January 2023. The report was a double whammy for rate cut expectations in that the expansion in services sector activity accelerated while the prices index jumped noticeably.
• Like the competing ISM report, the S&P Global U.S. Services PMI reported solid growth along with sharper price pressures in December, rising to a 33-month high of 56.8 from 56.1 in November. The rate of expansion in New Orders reached the fastest pace since March 2022. Employment increased for the first time in five months, while Business Confidence at 18-month high. Service providers expect the incoming administration to strengthen business conditions in 2025, leading to growing Business Confidence in the year-ahead outlook, which was the strongest in a year-and-a-half and above the series average, as 44% of firms expressed a positive outlook.  On the Prices front, Input Prices increased markedly, at a pace that was faster than the pre-pandemic average, leading companies to increase their own Output Prices.
• The Commerce Department reported U.S. Factory Orders fell -0.4% in November, more than the -0.3% expected and down sharply from the +0.5% the prior month (revised higher from the initially reported +0.2%). Factory Orders Ex-Transportation were up +0.2%, beating expectations for +0.1% and matching the prior month (after being revised up from +0.1%). Durable Goods Orders for long-lasting items such as televisions, appliances, and transportation equipment were down -1.2%, a slight decline from the -1.1% initial estimate and well below the -0.5% expected. Durable Goods Orders Excluding Transportation were down -0.2, slightly worse than the-0.1% from the initial estimate and well short of the +0.2% expected. The important Core Capital Goods Orders (capital goods excluding volatile sectors like transportation and defense), a proxy for business spending, was up +0.4%, beating expectations for +0.1% but down from the initial estimate of +0.7%. Core Capital Goods Shipments, which are factored into GDP, rose +0.3%, up from the initial estimate +0.5%. The key takeaway from the report is that the weakness in factory orders was concentrated in the volatile transportation equipment space; otherwise, there was a modest pickup in order activity.  
• U.S. Consumer Credit fell by -$7.5 billion in November, far short of Wall Street forecasts for a +$10.5 billion increase and down sharply from +$17.3 billion the prior month (which was revised lower from the initially reported +$19.2 billion). That’s a +1.7% annual growth rate, down from a +2.2% annualized growth rate the prior month. Growth for revolving credit, such as credit cards, fell by -12.0%, the largest monthly decline since August 2020. Nonrevolving credit, which tends to be much less volatile than revolving credit and includes auto as well as school loans, increased +2.0% following the prior month’s +0.7% rise. The data from the Federal Reserve is not adjusted for inflation and does not include mortgage loans, which is the largest category of household debt.
• The Census Bureau reported Wholesale Inventories slipped -0.2% to $902 billion in November, matching expectations of the preliminary estimate and down from the prior month’s flat reading. Year-over-Year (YoY) inventories were up +0.8%, slightly down from the preliminary reading of +0.9% but up from the prior month’s +0.7%. Inventories are goods produced for sale that have not been sold yet. Wholesale Trade Sales jumped +0.6%, up from the prior month’s -0.3% decline (revised lower from -0.1%) and well above expectations for +0.2%. Wholesale inventories data isn’t adjusted for inflation. The Inventory-to-Sales Ratio slipped to 1.33 months from 1.34 and has trended lower for the last year (it reflects how long it would take to sell all the goods at warehouses).  
• Weekly MBA Mortgage Applications fell -3.7% for the week ended January 03, following a -12.6% fall the week of Dec 27. The Purchase Index was down -6.6% after a -6.7% drop the prior week. The Refinance Index inched up +1.5% following the prior week’s -23.4% plunge. The average 30-Year Mortgage Rate rose for the fourth week in a row to 6.99% from 6.97% the prior week.
• Weekly Initial Jobless Claims fell -10,000 to 201,000 for the week ended January 4, better than expectations for claims of 215,000. The prior week was unrevised. The number of people already collecting unemployment claims (i.e., Continuing Claims) rose +34,000 to 1,867,000 in the week ended Dec 28, worse than expectations of 1,860,000 claims. Last week’s reading of 1,844,000 was revised lower to 1,834,000.

Asset Class Performance

Source: Bloomberg.

Asset‐class performance is presented by using market returns from an exchange‐traded fund (ETF) proxy that best represents its respective broad asset class. Returns shown are net of fund fees for and do not necessarily represent performance of specific mutual funds and/or exchange-traded funds recommended by The Retirement Planning Group. The performance of those funds may be substantially different from the performance of the broad asset classes and to proxy ETFs represented here. US Bonds (iShares Core US Aggregate Bond ETF); High‐Yield Bond (iShares iBoxx $ High Yield Corporate Bond ETF); Intl Bonds (SPDR® Bloomberg Barclays International Corporate Bond ETF); Large Growth (iShares Russell 1000 Growth ETF); Large Value (iShares Russell 1000 Value ETF); Mid Growth (iShares Russell Mid-Cap Growth ETF); Mid Value (iShares Russell Mid-Cap Value ETF); Small Growth (iShares Russell 2000 Growth ETF); Small Value (iShares Russell 2000 Value ETF); Intl Equity (iShares MSCI EAFE ETF); Emg Markets (iShares MSCI Emerging Markets ETF); and Real Estate (iShares US Real Estate ETF). The return displayed as “Allocation” is a weighted average of the ETF proxies shown as represented by 30% US Bonds, 5% International Bonds, 5% High Yield Bonds, 10% Large Growth, 10% Large Value, 4% Mid Growth, 4% Mid Value, 2% Small Growth, 2% Small Value, 18% International Stock, 7% Emerging Markets, 3% Real Estate.

* The term basis points (bps) refers to a common unit of measure for interest rates and other percentages in finance. One basis point is equal to 0.01%. Bond prices and bond yields are inversely related. As the price of a bond goes up, the yield decreases.