Weekly Market Update – January 17, 2025

Quick Takes

• Stocks notched their best week since the November election, with the S&P 500 Index gaining +2.9%. All 11 sectors rose, the top three sectors – Energy, Financials, and Materials –were all up just better than +6% for the week.
• The primary catalyst for the rally was cooler-than-expected wholesale and consumer inflation reports. The favorable inflation data reignited bets that the Federal Reserve will continue to ease monetary policy.
• Bonds also rebounded last week, with 10-year U.S. Treasury yields down about -13 basis points to finish the week at 4.63%. The Bloomberg U.S. Aggregate Bond Index rebounded +1.0%, only its second positive week in the last six.

Source: Bloomberg. Data as of January 17, 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.

Stocks Had Their Best Week Since the Election, Bonds Up Too

After much seesawing in December and a rocky start to the new year, the bulls stormed back last week. Stocks notched their best week since the November election, with the S&P 500 Index gaining +2.9%. It was actually a historical performance for the S&P, with the index marking five straight days with more than 68% of its members advancing, which ties the record going back to 1928. That kind of strong market breadth is an indication of a very broad-based, robust rally. Another display of the broad participation of the week’s rally was that all 11 sectors rose, most more than +1% or better, except Health Care, which gained a modest +0.4%. Though positive, it paled in comparison to the leading sectors – Energy, Financials, and Materials – which were all up just better than +6% for the week. Further emphasizing the breadth of last week’s rally was small cap stocks leading the major indexes, with the Russell 2000 Index up +4.0% for the week, its best since late November. The tech-heavy Nasdaq Composite Index was up +2.5%. 

The primary catalyst for the rally were two inflation reports, which showed wholesale prices (reported Tuesday morning) and consumer prices (reported Wednesday morning) both cooled more than expected in December. The favorable inflation data reignited bets that the Federal Reserve (the FED) will continue to ease monetary policy. 

Also helping encourage investors last week were solid earnings reports for major U.S. banks, which kicked off the fourth quarter earnings season on Wednesday. JPMorgan, Citigroup, Wells Fargo, Goldman Sachs, Bank of America, and Morgan Stanley all delivered solid quarterly results driven by strong investment management and trading activity in 2024. The earnings calendar will pick up significantly this week with some of the world’s largest companies set to report profits.

Overseas, stocks also advanced but not quite to the extent that their domestic counterparts did. Developed market international stocks (as measured by the MSCI EAFE Index) were up +1.9%, which was their best week since late September.  Emerging market stocks (the MSCI Emerging Markets Index) were up +1.2%. Most major European markets saw solid gains for the week, with stocks in France, Germany, and Italy all up over +3%. Like the U.S., U.K. stocks were also beneficiaries from unexpectedly slower inflation, and despite stagnant GDP growth, the FTSE 100 Index was up +3.1%. In Asia, Japan’s Nikkei 225 Index actually fell -1.9% on hawkish signals from its central bank, which signaled it may hike rates at its January 23-24 monetary policy meeting. On the other hand, Chinese stocks rose on better-than-expected +5.4% fourth quarter annualized GDP growth. Some other data also showed signs of needed economic recovery.

Bonds also rebounded last week, with 10-year U.S. Treasury yields down about -13 basis points to finish the week at 4.63%. Of course, the cooler inflation data was very welcome news to bond investors. That data helped to bring bond yields down from recent highs after their relentless rise for several weeks. The Bloomberg U.S. Aggregate Bond Index rebounded +1.0%, only its second positive week in the last six. Non-U.S. bonds, as measured by the Bloomberg Global Aggregate ex U.S. Bond Index, were up +0.9% for the week.

This week will be the fourth 4-day week already this year, with markets closed on Monday for Martin Luther King Jr. Day. It also marked U.S. President Donald Trump‘s inauguration. Uncertainty remains about the effects of Trump’s proposed policies, particularly tariffs. Stocks rallied big following the election on optimism that the new administration will enact pro-growth policies, ease the regulatory burden for companies, and reduce taxes. While stocks rebounded last week on the cooling inflation data, they may have another reason to cheer a new administration. History shows the performance of the stock market usually improves after inauguration day over the subsequent three-month period. According to analysis from Jefferies Financial Group, the S&P 500 Index “typically trades lumpy around inaugurations,” but then it gains +3.7%, on average, in the 3 months following the inauguration, +8.3% in the 6 months into an inauguration, and about +9.5% 12 months in following an inauguration. That would indicate a 2025 return about half of the 20%+ returns of the last two calendar years, but would still be a healthy gain, especially in real terms, if inflation continues to cool and the Fed cuts rates.

The Week Ahead

Markets were closed on Monday for Martin Luther King Jr. Day, and the remainder of the week has a very light economic calendar. Economic data releases to watch include the Conference Board’s Leading Economic Index on Wednesday, then the S&P Global’s Manufacturing and Services Purchasing Managers Indexes for January, and the National Association of Realtors’ Existing Home Sales for December, both on Friday. More attention will be given to activity around the first actions of the Trump administration and the busy schedule of fourth-quarter earnings reports. 3M, Charles Schwab, D.R. Horton, Netflix, and United Airlines Holdings release results on Tuesday, followed by GE Vernova, Johnson & Johnson, and Procter & Gamble on Wednesday. On Thursday, Freeport-McMoRan, GE Aerospace, Texas Instruments, and Union Pacific will report, then American Express, NextEra Energy, and Verizon Communications release earnings on Friday. Outside the U.S., the Bank of Japan will announce a highly anticipated monetary-policy decision on Friday. The central bank is expected to hike interest rates by a quarter of a point to 0.5%.

Chart of the Week

The core rate of inflation for consumer goods and services slowed a bit in December, coming in below expectations. The headline Consumer Price Index (CPI) was up +0.4% as expected, which was a tick below the unrevised +0.3% the prior month. Likewise, the year-over-year (YoY) CPI grew at a +2.9% rate, also in line with expectations and slightly up from an unrevised +2.7% rate. However, Core CPI, which excludes the more volatile food and energy prices, was up just +0.2% for the month, below expectations for a +0.3% rise, which is where it was the prior month. YoY Core CPI was +3.2%, below expectations and down from +3.3%, which is where it was the prior month. The Federal Reserve and Wall Street generally consider the Core CPI as a better predictor of future inflation. Major contributors to CPI included a +2.6% increase in Energy prices, largely driven by a +4.4% surge in gasoline. As shown in the chart below, Shelter remains a notable driver and represents about one-third of the CPI weighting. It increased by +0.3% for the month and +4.6% for the year, which was the smallest annual gain since January 2022. Food prices also rose, up +0.3% for the month and +2.5% in 2024. Egg prices jumped +3.2%, taking the annual gain to +36.8%.  Used car and truck prices jumped +1.2%, while new vehicle prices moved higher by +0.5%. Transportation services surged +0.5% and were up +7.3% on an annual basis. Auto insurance rose +0.4% and was up +11.3% annually. The report further solidified the market outlook for a -0.25% cut this Wednesday, with traders raising the odds to 99%, according to the CME Group FedWatch tool. Stock jumped following the release on Wednesday morning while Treasury yields tumbled, and day’s gains drove most of the week’s move for both.

Service Prices Remain Sticky, Food Prices Still Rising

Consumer Price Index (CPI) by Component, 2015 – 2024

Source: Bloomberg Economic Analysis (ECAN).

Did You Know?

SHORT-TERMISM – Zero-Day To Expiration (0DTE) options for the S&P 500 Index (option contracts that expire on the same day they are traded) accounted for 51% of all S&P 500 option volume in Q4. It was the first quarter ever that 0DTE options accounted for the majority of all trading volume in S&P 500 options contracts. (Source: Asym 500)

ELECTION RALLY FADED – After rallying more than +5% through mid- December, the S&P 500’s gains since Election Day (Nov. 5) fell to just +1% as of Jan. 10. Seven of the eleven S&P 500 sectors were down -2.5% or more since Election Day, with Materials down the most at -10.5%. But the S&P regained much of those lost gains in just the last week to a total return of +4% since election day, and the Materials sector cut its loss nearly in half to -5.5%.  (Source: Bespoke, Bloomberg)

MUST BE THIS TALL TO RIDE – S&P Global announced that the minimum market cap required to be eligible for inclusion in the S&P 500 Index (large cap U.S. equity index) will increase from $15.8 billion at the start of 2024 to $20.5 billion. Ten years ago, the minimum market cap threshold necessary for inclusion was just $5.3 billion. (Source: S&P Global)

This Week in History

NO MARGIN – On January 17, 1946, the Federal Reserve temporarily eliminated all margin trading after the stock market had gained more than +20% in the five months following the end of World War II. (Source: The Wall Street Journal)

Economic Review

• The National Federation of Independent Business (NFIB) reported that their Small Business Optimism Index rose to 105.1 from an unrevised 101.7 the prior month. That is the highest level since October 2018. Seven of the 10 component indexes rose, with two declining and one flat. The biggest improvement came from the Expect Economy to Improve component, which was up +16 points to a net +52% reading, the second month as the biggest contributor and the highest level since 1983. Expect Real Sales Higher was also up a strong +8 points to a net to +22%, the highest since January 2020, before the COVID shutdowns. Now a Good Time to Expand rose +6 points to a net +20%, which is the highest since February 2020. The separate Uncertainty Index declined -12 points for the second straight month, falling to 86 after hitting a record high of 110 in November. “Optimism on Main Street continues to grow with the improved economic outlook following the election,” said NFIB Chief Economist Bill Dunkelberg, adding, “small business owners feel more certain and hopeful about the economic agenda of the new administration. Expectations for economic growth, lower inflation, and positive business conditions have increased in anticipation of pro-business policies and legislation in the new year.”
• The Commerce Department reported that U.S. Retail Sales were up +0.4% in December, shy of expectations for a +0.6% increase and half the +0.8% increase the prior month (which was revised higher from +0.7%). Retail sales represent about one-third of all consumer spending and offer clues on the strength of the economy. Sales were driven by new vehicles again which were up +0.7% following a +2.6% rise the prior month. Auto sales account for one-fifth of all retail sales. Sales ex-autos were also up +0.4, while the increase seen for Sales ex-autos and gas was +0.3%. Both were unrevised from the prior month. Restaurant sales, a key economic bellwether that tends to rise when the economy is healthy, were a potential concern, falling slightly for the first time in nine months. The Control Group, a figure used to calculate GDP, was up a strong +0.7%, beating expectations for a +0.4% reading, which was the prior month’s unrevised level.
• Wholesale inflation was cooler than expected in December. The headline Producer Price Index (PPI) was up +0.2% for the month, below expectations for +0.04%, which is where it was the prior month (unrevised). Year-over-year (YoY) PPI increased at +3.3% rate, below expectations for +3.5% but up from the prior month’s +3.0% rate (unrevised). That’s the highest rate in almost two years. The most encouraging aspect of the report was no increase in the cost of Services, one of the biggest drivers of inflation in the past few years, although they still have risen a sharp +4% in the past year — double the prepandemic average. Wholesale food costs fell slightly following a +3.1% jump the prior month, which was the biggest increase in two years. Core PPI, which strips out volatile food and energy costs, was flat in December, below expectations for a +0.3% rise and down from last month’s +0.2% rate (unrevised). YoY Core PPI was up +3.5%, below expectations for +3.8% and down from the prior month’s +3.5% annual rate (revised up from +3.4%). Goods prices jumped in December, mostly because of an increase in Energy prices. The primary takeaway from the report is that the pronounced slowdown in inflation over the past two years appears to have cooled, at least temporarily.
• Imports Prices rose +0.1% for the third straight month in December, above expectations for a decline of -0.1%. Import Prices ex Petroleum were up +0.2%, unchanged from the unrevised level the prior month and above expectations for -0.1% reading. Both fuel and non-fuel prices were higher despite the appreciation of the U.S. dollar. Year-over-year, the cost of imports was up +2.2% from +1.4% the prior month and a tick above expectations for a +2.1% increase. Export Prices were up +0.3%, more than the expected increase of +0.1% and the prior month’s unrevised flat reading. Export prices accelerated to +1.8% over the past year, higher than expectations for a +1.6% increase and last month’s +0.9% annual rate (revised higher from the originally reported +0.8%).
• The U.S. Treasury Department recorded a Federal Budget Deficit of $86.7 billion in December, -33% smaller than in the same month last year. Receipts rose +5.8% while Outlays fell -3.1%. The decline in spending was largely due to certain payments due December 1 (a nonbusiness day) being accelerated into November, which more than offset payments due January 1 (another nonbusiness day) that were accelerated into December. If not for these timing shifts, the federal deficit year to date would be about +$37 billion larger than recorded. The federal government is running on a continuing resolution, which mostly held spending constant from fiscal 2024 to fiscal 2025. Yet, The U.S. federal budget deficit widened to a record $711 billion in the first three months of the fiscal year 2025 (beginning in October), up from $510 billion in the same period last year, an increase of +39%. Outlays in the first quarter of the fiscal year rose to a record $1.8 trillion, up +39% compared with the same period of the previous year. Receipts rose $1.1 trillion over the first quarter, a -2% decline from the previous year. The Treasury Budget data are not seasonally adjusted, so the December deficit cannot be compared to the November deficit.
• U.S. Industrial Production increased +0.9% in December, a sharp improvement from the +0.2% gain the prior month (revised higher from -0.1%) and above expectations for a +0.3% increase. It breaks three straight months of declines. Manufacturing output jumped +0.6% versus the +0.2% expected by Wall Street. Manufacturing represents about three-quarters of total Industrial Production and had struggled from limited capital spending as a result of high borrowing costs. Capacity Utilization jumped to 77.6% from an upwardly revised 77.0% (originally 76.8%), where it was expected to come in. Capacity Utilization reflects how much a manufacturing plant is being used to produce things.
• The New York Fed’s Empire State Manufacturing Index, a gauge of manufacturing activity in the state, sank -14.7 points in January to -12.6. This comes after a -26 point decline in December, massively missing expectations to tick up to 3.0 from an upwardly revised +2.1 the prior month. New Orders and Shipments both retreated again to fall into negative territory. However, forward-looking indicators improved, with the index for Business Conditions Expected in Six Months hitting a three-year high of +36.7 and Average Employee Workweek expected to pick up, jumping to -19.8, the highest since early 2021. Of concern, the inflation components jumped with the Prices Paid indicator up +8.0 points to +29.1, and the Prices Received indicator up +5.1 points to +9.3.
• Manufacturing in the Federal Reserve’s Third District surged to +44.3 in January, its highest since April 2021, from -10.9 the prior month (revised higher from -16.4), according to the Philly Fed Manufacturing Business Outlook Survey. That was far above expectations for an improvement to -5.0 (readings above zero indicate economic expansion) and the index’s largest monthly increase since June 2020. The indexes for New Orders and Shipments both rose sharply, up +47 points to +42.9 and +39 to +41, respectively. The Employment index improved +7 points to +11.9. The Six-Month Business Outlook rose to +46.3 from +33.8 the prior month. The Prices Paid index moved up to +31.9 from +26.6, while the Prices Received index rose to +29.7 from +5.6.  
• December Building Permits, one of the leading indicators tracked by the Conference Board, were down -0.7% to 1,483,000, following the prior month’s +5.2% jump to 1,493,000 units (revised higher from -0.6%). That was much better than the expected -2.2% decline to 1,460,000 units. Single-unit permits were up +1.6%, while multi-unit permits for buildings fell -5.0%. Regionally, permits were up +5.0% in the Northeast, down -1.4% in the Midwest, up +1.0% in the South, and down -6.6% in the West. Meanwhile, Housing Starts jumped +15.8% to a seasonally adjusted annual rate of 1,499,000 units, more than the expected increase of +3.0% to 1,327,000 units and up sharply from the prior month’s negatively revised 1,294,000 units, or -3.7% decline (originally 1,289,000 and -1.8%). Housing starts peaked at 1,800,000 units in April 2022. Single-family homes rose +3.3% in the month, while multi-family units soared +61.5%. New construction starts were up +14.3% in the Northeast, +8.3% in the Midwest, flat (0.0%) in the South, and up +7.1% in the West. 
• Homebuilder confidence rose to a 9-month high of 47 in January from an unrevised 46 in December, according to the National Association of Home Builders (NAHB) Housing Market Index (HMI). That was above expectations for 45. A year ago, the index stood at 34. The index is based on a 0-to-100 scale, where any number over 50 indicates a good reading, and below 50 is considered negative sentiment. The Current Sales component improved to 51 from 48 the prior month, while Sales Expectations in the Next Six Months slipped to 60 from 66 the prior month, which was the highest level since April 2022.  Traffic of Prospective Buyers rose +2 points to 33. For the month, 30% of builders reported cutting home prices, down from 31% the prior month. The average price reduction was also unchanged, at 5%. The use of sales incentives beyond price cuts ticked up to 61% from 60%. 
• Weekly MBA Mortgage Applications surged +33.3% for the week ending January 10 following a -3.7% fall the week of Jan 3. The Purchase Index jumped +26.9% after a drop of -6.6% the prior week. The Refinance Index soared +43.5% following the prior week’s +1.5% rise. The average 30-Year Mortgage Rate rose for the fifth week in a row to 7.09% from 6.99% the prior week. This is the first time above 7% since June 2024.
• Weekly Initial Jobless Claims fell -10,000 to 201,000 for the week ending 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 ending 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.