Weekly Market Update – February 14, 2025

Quick Takes

• More tariff talk and hotter-than-expected inflation data couldn’t keep stocks and bonds from rising. The U.S. benchmark S&P 500 Index was up +1.5%, breaking a two-week losing streak, while the Bloomberg U.S. Aggregate Bond Index was up +0.2%, its fifth week up.
• Surprisingly, stocks and bonds overseas were up even more. Developed market international stocks (the MSCI EAFE Index) rose +2.6% while the MSCI Emerging Markets Index was up 1.5%. The Bloomberg Global Aggregate ex U.S. Bond Index gained +0.7%.
• Inflation reports on consumer prices, producer prices, as well as import and export prices were almost universally higher than expected. Moreover, many of the prior month’s data points were revised higher. The takeaway being that the inflation fight isn’t over.

Source: Bloomberg. Data as of February 14, 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 and bonds rise despite higher than expected inflation

A bevy of inflation data during the week was mostly higher than expected, and the prior month’s data was largely revised higher, but Wall Street was able to overcome that to end a two-week losing streak. The S&P 500 Index was up +1.5% for the week to close just -0.07% below its all-time high. The Nasdaq Composite Index was up +2.6%, its best week since early December, on the strength of the Technology sector which was up +3.8% (S&P 500 Technology Sector). Small cap stocks lagged, but the Russell 2000 Index was able to eke out a +0.01% gain to technically end its two-week losing streak. Earnings have helped buoy investor confidence. According to FactSet, with three-quarters of S&P 500 companies having reported profits, they are on track to deliver growth of +16.9% for the fourth quarter, which would be the best quarter in three years. 

Stocks overseas were even stronger with the U.S. dollar falling -1.2% for the week, helping developed market international stocks (as measured by the MSCI EAFE Index) to gain +2.6% while emerging market stocks (the MSCI Emerging Markets Index) rose 1.5%. The STOXX Europe 600 Index was up +1.8%, Japan’s Nikkei 225 Index rose +0.9%, and China’s Shanghai Composite Index rose 1.30%.

The performance of global stocks was even more impressive in light of the week’s news cycle being dominated by President Donald Trump’s announcements on tariffs. On Monday, he announced 25% levies on all steel and aluminum imports into the U.S. On Thursday, he signed a memorandum that tasked his administration with investigating current trade relations and proposing reciprocal tariffs on a country-specific basis.

Tariff talk and hotter-than-expected inflation data wasn’t enough to sink bonds either. Declining Treasury yields have been a tailwind for the market generally, and the benchmark 10-year U.S. Treasury yield was down another -2 basis points, the fifth week of declines, to finish the week at 4.48%. At one point after Wednesday’s unexpectedly high Consumer Inflation Index (CPI) was reported, the 10-year UST yield touched 4.66%, but then trended down through the end of the week. The Bloomberg U.S. Aggregate Bond Index saw a modest +0.2% rise, but that was good enough for a fifth consecutive week of gains. Non-U.S. bonds, as measured by the Bloomberg Global Aggregate ex U.S. Bond Index, gained +0.7% for the week, and are now up in 4 of the last 5 weeks.

The Week Ahead

It will be a holiday-shortened and data-light week, with U.S. markets closed on Monday for Presidents Day and housing data the dominant theme for the rest of the week. Housing reports include homebuilder confidence (NAHB Housing Market Index) for February on Tuesday, Housing Starts and MBA Mortgage Applications on Wednesday, then Existing Home Sales on Friday. Data outside the housing sector includes Federal Reserve manufacturing surveys from the New York and Philadelphia regional districts, minutes from the Federal Open Market Committee’s January policy meeting is Wednesday afternoon, the Conference Board Leading Economic Index (LEI) on Thursday, and S&P Global will release both its Manufacturing and Services Purchasing Managers’ Indexes (PMIs) for February on Friday.

Earnings season winds down with Arista Networks, Devon Energy, Medtronic, and Occidental Petroleum report on Tuesday, followed by Analog Devices and Garmin on Wednesday, then Alibaba Group Holding, Block, Booking Holdings, Newmont, and Walmart on Thursday.

Chart of the Week

On Friday morning the Commerce Department reported that U.S. Retail Sales slumped -0.9% in January, far short of expectations for a -0.2% decrease and the +0.7% increase the prior month (which was revised higher from +0.4%). Retail sales represent about one-third of all consumer spending and offer clues on the strength of the economy. Sales suffered from a severe cold snap across the country, massive wildfires in California, as well as reduced spending as Americans paid off credit cards after their holiday purchases. It was just the prior week that Consumer Credit was released, and it soared by the largest amount in history as consumers maxed out their credit – and it looks like January was the credit hangover. A sharp drop in new vehicles was a big culprit for the drop. Auto sales account for one-fifth of all retail sales. Sales ex-autos were down -0.4%, worse than the +0.3% expected. Sales ex-autos and gas was down -0.5%, also far off expectations of +0.3%. Both were revised higher from the prior month. Restaurant sales, a key economic bellwether that tends to rise when the economy is healthy, were actually up +0.1%, bucking the overall trend. The Control Group, a figure used to calculate GDP, sank -0.8%, sharply lower than expectations for a +0.3% increase and the +0.8% from the prior month (which was revised higher from +0.7%). By most accounts, the U.S. economy grew rapidly in 2024 despite high interest rates and stubbornly high inflation and has gotten off to a decent start in 2025. January is often a rough month for retailers, and with a nationwide cold snap more data will be needed to see if consumers are truly tired. 

Retail Sales Post Biggest Drop in Almost Two Years

Retail Sales, Month-over-Month % Change, January 2022 – January 2025

Source: U.S. Census Bureau, Trading Economics.

Did You Know?

SEEKING AI – U.S. consumers continue to seek out information on Artificial Intelligence (AI), with searches for “AI” on Google hitting another record in February. Google searches for “AI” are now double what they were in December 2023 and nearly 10x higher than November 2022 levels when ChatGPT was released. (Source: Google Trends, MFS)

WORTH A TRY  – The share of patients who appeal the denial of their health-insurance claims is less than 1%, out of about 850 million denials, according to an appeals company that analyzed data from nonprofit and federal sources. Patients who fight back face a daunting process, but many are successful. Insurers say that to remain solvent, they must determine what does and doesn’t merit reimbursement. (Source: The Wall Street Journal)

SECTOR ROTATION – Weakness in mega-cap technology stocks at the start of 2025 has caused a shift in sector performance compared to recent years. Through 2/5, ten of the eleven major S&P 500 sector ETFs were up on the year, while technology was the lone loser with a year-to-date (YTD) drop of 2%. (Source: Bespoke)

This Week in History

BOWIE BONDS – On February 10, 1997, Prudential Insurance emerged as the investor backing a pioneering financial instrument: debt backed by music royalties. David Bowie became the first musician to securitize his back catalog with Prudential snapping up all $55 million of the “Bowie bonds,” which paid 7.9% interest. (Source: The Wall Street Journal)

Economic Review

• The core rate of inflation for consumer goods and services unexpectedly rose in January. The headline Consumer Price Index (CPI) was up +0.5% for the month, which was a tick above the unrevised +0.4% the prior month, and above the +0.3% that Wall Street was forecasting. Year-over-year (YoY), CPI was +3.0%, versus +2.9% the prior month which is where it was expected to stay. Core CPI, which excludes the more volatile food and energy prices, was up +0.4% for the month, above expectations for a +0.3% rise and the unrevised +0.2% from the prior month. YoY Core CPI was +3.3%, above expectations for +3.1% and up from an unrevised +3.2% the prior month. The Federal Reserve and Wall Street generally considers the Core CPI as a better predictor of future inflation. Major contributors to CPI included a +1.1% increase in Energy prices. Shelter remains a notable driver and represents about one-third of the CPI weighting. It increased by +0.4% for the month and +4.4% for the year. Food prices also rose, up +0.4% for the month and +2.5% for the year. Used car and truck prices jumped +2.2% in January.  
• Wholesale inflation was also hotter than expected in January. The headline Producer Price Index (PPI) was up +0.4% for the month, above expectations for +0.03% but down from +0.5% the prior month — although that was only because it was revised higher from the originally reported +0.2%. Year-over-year (YoY) PPI increased at +3.5% rate, also above expectations, which was for a +3.3% increase. That was unchanged from the prior month’s annual rate, but only because it too was revised higher from the original release of+3.3%. That’s the highest annual rate since 2023. Core PPI, which strips out volatile food and energy costs, was +0.3% in January, matching expectations but down from +0.4% the prior month. However, like the headline numbers the December level was revised sharply higher from the originally reported flat (0.0%) reading. YoY Core PPI was up +3.6%, above expectations for +3.3% and down from the prior month’s +3.7% annual rate (once again, revised up from +3.5%). Goods prices were up +0.6% in January, the fourth consecutive monthly increase, largely from a +1.7% jump in Energy prices, which contributed more than half the gain in Goods. The index for Services jumped +0.3% in January, the sixth consecutive increase. The primary takeaway from the report was the almost universal higher revisions to the prior month’s data that increased the base comparison that otherwise would have shown an acceleration from the prior month.
• Imports Prices rose +0.3% in January, the biggest increase in nine months, but below expectations for +0.4%. That was up from the prior month’s +0.2% which was revised higher from +0.1%. Import Prices ex Petroleum were up +0.1%, down from an unrevised +0.2% the prior month where they were expected to remain. So, Energy accounted for the bulk of the monthly jump in import prices. Year-over-year, the cost of imports was up +1.9%, matching expectations and up from +2.3% the prior month (revised higher from +2.2%). Meanwhile, Export Prices jumped +1.3%, much more than the expected increase of +0.3% and twice the prior month’s +0.5% reading (revised higher from +0.3%). Export prices accelerated to +2.7% over the past year, higher than expectations for a +1.4% increase and last month’s +2.0% annual rate (revised higher from the originally reported +1.8%). That was the highest monthly rate since May 2022 and the highest annual rate since December 2022. 
• U.S. Industrial Production increased +0.5% in January, higher than expectations for +0.3% but half the level from the prior month (revised higher from +0.9%). 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. Year-over-Year, Industrial Production was up a whopping +2.0%, the largest annual increase since October 2022. That was up from a +0.3% annual rate the prior month, which was revised lower from the originally reported +0.5%. Capacity Utilization jumped to 77.8% from a downwardly revised 77.5% (originally 77.6%), slightly above expectations for 77.7%. Capacity Utilization reflects how much a manufacturing plant is being used to produce things. Industrial Production has been relatively flat for two years and the unexpectedly large gains may be a sign that tariff threats are boosting demand for U.S. factory goods.
• The National Federation of Independent Business (NFIB) reported that their Small Business Optimism Index fell to 102.8 from an unrevised 105.1 the prior month, which was the highest level since October 2018. Seven of the 10 component indexes declined, with two flat and one positive. The sole improvement came from the Earnings Trend component, which rose by a point, and is a good harbinger for the bull market to continue. Current Inventory and Current Job Openings were unchanged. The biggest detractor was Plans to Make Capital Outlays, which fell by -7 points to 20%. The separately produced Uncertainty Index that is released with the Small Business Index rose +14 points to 100 after falling -12 points for two straight months. That is still shy of the record high of 110 in November, but a reflection of the trade uncertainty surrounding the Trump administration tariff announcements. “Overall, small business owners remain optimistic regarding future business conditions, but uncertainty is on the rise,” said NFIB Chief Economist Bill Dunkelberg, adding “Hiring challenges continue to frustrate Main Street owners as they struggle to find qualified workers to fill their many open positions. Meanwhile, fewer plan capital investments as they prepare for the months ahead.” 
• The U.S. Treasury Department recorded a Federal Budget Deficit of $128.6 billion in January, a sharp increase from the -21.9% deficit in the same month last year, and exceeding expectations for a -94.8% shortfall. Receipts were $513.3 billion, up +7.5% from the year earlier, while Outlays were $513.3 billion, a +28.6% rise. The increase in spending was largely due to Medicare and Social Security payments, which more than offset the largest source of receipts which was Individual Income Taxes and Social Insurance & Retirement receipts.  The U.S. federal budget deficit widened to a -$839.6 billion in the first four months of the fiscal year 2025 (beginning in October), up from $531.9 billion in the same period last year, an increase of +57.9%. The Treasury Budget data are not seasonally adjusted so the current month cannot be compared to the prior month, but rather needs to be compared to the year earlier data. 
• Weekly MBA Mortgage Applications were up +2.3% for the week ending February 7 following a +2.2% rise the prior week. The Purchase Index fell -2.3% after falling -3.5% the prior week. The Refinance Index increased +9.6% following the prior week’s +12.2% jump. The average 30-Year Mortgage Rate slipped to 6.95% from 6.97% the prior week.
• Weekly Initial Jobless Claims decreased by -7,000 to 213,000 for the week ending February 8, better than expectations for claims of 216,000. The prior week was revised higher from 219,000 to 220,000. The number of people already collecting unemployment claims (i.e., Continuing Claims) fell by -36,000 to 1,850,000 in the week ending February 1, better than expectations of 1,882,000 claims. Last week’s reading of 1,886,000 was unrevised.

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.