Weekly Market Update – February 21, 2025

Quick Takes

• U.S. stocks started the week off strong, with the S&P 500 Index notching its second and third all-time highs on Tuesday and Wednesday but then had its worst day of the year on Friday, to end the week down -1.7%.
• Bond yields continued their gradual descent, with the benchmark 10-year U.S. Treasury yield sliding for a sixth consecutive week of declines. The Bloomberg U.S. Aggregate Bond Index was up for a sixth consecutive week, gaining +0.4% for the week.
• The culmination of another Federal Reserve indication that there may not be any more interest rate cuts, some soft economic data, more tariff turbulence, weak earnings and forward guidance from some bellwether market leaders, and perhaps some seasonal weakness all took a toll on investor sentiment by the end of the week.

Source: Bloomberg. Data as of February 21, 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 set new record highs but end on a weak note

Wall Street was closed for observance of the President’s Day holiday on Monday, but on Tuesday and Wednesday the U.S. benchmark S&P 500 Index notched its second and third all-time highs of the year. Thursday saw profit taking with the index slipping -0.4% but on Friday sentiment turned decidedly risk-off as the index sank -1.7%, its worst single day of 2025. The culmination of another Federal Reserve signal that there may not be any more interest rate cuts, some weak economic data, more tariff turbulence, weak earnings and/or forward guidance from some bellwether market leaders, and perhaps some seasonal weakness all took a toll on investor sentiment. On Wednesday afternoon the FOMC minutes of the January monetary policy committee meeting were released and showed that policymakers wanted to see further progress on inflation before adjusting interest rates any further. The Fed minutes also showed that trade and immigration policies could add to uncertainty about the progress of their fight against inflation. The trade policy uncertainty was further highlighted on Tuesday when U.S. President Donald Trump previewed potential 25% tariffs on imports of cars, semiconductors, and pharmaceuticals to be effective as soon as April 2. Weaker than expected earnings and forward guidance from firms like Walmart worried investors that consumer spending may be weakening, tech darling Palantir sold off on Thursday and Friday over concerns about defense spending cuts, and UnitedHealth Group was a drag on U.S. stock indices in the wake of a report from the Wall Street Journal that said the Department of Justice was looking into the health insurer’s Medicare billing practices. Markets were further spooked on Friday morning from economic data that showed cracks in the key service sector of the economy. S&P Global’s survey of manufacturing activity was solid, but the services sector activity came up short of expectations. Friday morning reports also showed that U.S. consumer sentiment slid more than expected and that U.S. existing-home sales declined nearly -5% in January. Seasonally the last two weeks of February is one of the worst two-week periods of the year. It is one of only three two-week periods to average negative returns for the S&P 500 since 1950. Only the last two weeks of June and the last two weeks of September also average negative returns (and exceed the average loss of the back half of February). 

In the end, the S&P 500 fell -1.7% for the week, the tech-heavy Nasdaq Composite Index slid -2.5% and the small cap Russell 2000 Index dropped -3.7%. According to the CME FedWatch Tool, the futures market is pricing in a 63.7% chance of an interest-rate cut from the Federal Reserve in the first half of the year, which is actually up from 50.4% a week ago. Overseas, stocks were mixed. Developed market international stocks (as measured by the MSCI EAFE Index) slipped -0.2% but emerging market stocks (the MSCI Emerging Markets Index) rose 2.0%. Stocks overseas continue to get a boost from a weaker U.S. dollar, which dipped -0.1% for the week, its third straight weekly decline. 

Bond yields continued their gradual descent, with the benchmark 10-year U.S. Treasury yield sliding another -4 basis points to finish the week at 4.43%. It was the sixth week of declines.  The yield on the 2-year Treasury note fell -6 basis points to finish the week at 4.20%. The Bloomberg U.S. Aggregate Bond Index was up for a sixth consecutive week, gaining +0.4%. Non-U.S. bonds, as measured by the Bloomberg Global Aggregate ex U.S. Bond Index, slid -0.1%, following two weeks of gains.

The Week Ahead

Inflation will be in the spotlight next week with the release of the January Core Personal Consumption Expenditures (PCE) Price Index—widely seen as the central bank’s preferred inflation gauge. The Bureau of Economic Analysis (BEA) will also release its second estimate of fourth-quarter Gross-Domestic Product (GDP) on Thursday. Real estate data next week include S&P CoreLogic’s Case-Shiller National Home Price Index for December on Tuesday and New Home Sales from the Census Bureau on Wednesday. The National Association of Realtors releases Pending Home Sales for January on Thursday. Regional Fed manufacturing surveys will be reported by Dallas on Monday, Richmond on Tuesday, Kansas City on Thursday, and the Chicago MNI on Friday.

The final week of February will be busy for earnings with Domino’s Pizza, Diamondback Energy, and Zoom Communications reporting results on Monday. Caesars Entertainment, Cava Group, Home Depot, and Workday will report on Tuesday. Nvidia, Anheuser-Busch InBev, eBay, Lowe’s, Salesforce, Snowflake, and TJX are due on Wednesday. Autodesk, HP, and Warner Brothers Discovery will round things out on Thursday. According to data from FactSet, with about 86% of the constituents of the S&P 500 having reported for Q4 2024, blended earnings per share (which combines reported data with estimates for those that have yet to report) are up about +17.2% versus the same quarter a year ago.

Chart of the Week

January Building Permits, one of the leading indicators tracked by the Conference Board, were up +0.1% to 1,483,000, following the prior month’s -0.7% decline to 1,482,000 units (unrevised). That was better than the expected -1.5% decline to 1,460,000 units. Single-unit permits were flat (0.0%), while multi-unit permits for buildings rose +0.2%. Regionally, permits were up +2.3% in the West and +1.8% in the Midwest, down -6.1% in the Northeast and -0.1% in the South. Year-over-year permits were down -1.7%. Meanwhile, Housing Starts fell -9.8% to a seasonally adjusted annual rate of 1,366,000 units, more than the expected decrease of -7.3% to 1,390,000 units. That compares to the prior month’ positively revised 1,515,000 units, or +16.1% increase (originally 1,499,000 and +15.8%). Housing starts peaked at 1,800,000 million in April 2022. New construction starts were down -27.6% in the Northeast, -10.4% in the Midwest, down -23.3% in the South, and up +42.3% in the West.

Building Permits Unexpectedly Edge Higher in January

Building Permits have remained above the historically critical 1.4 million level.

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

Did You Know?

SEARCHING FOR “TARIFFS” – U.S. Google searches for “inflation” in the US spiked 1,000% from the end of 2020 to their peak in August 2022, but search interest for “tariffs” in the first week of February was double the 2022 peak for “inflation.” The word “tariffs” was searched for in the Washington DC area at more than twice the rate of any other state. (Source: Google Trends, MFS)

OIL ROUND TRIP  – The price of West Texas Intermediate (WTI) crude oil rallied +12.6% from $71.7/barrel up to a high of $80.8 in the first 15 days of 2025, but it has since fallen back down to $70.25 as of February 21. The American Automobile Association (AAA) national average tracker for gas prices, however, has risen from $3.06/gallon up to $3.51/gallon so far this year. (Source: Bespoke, AAA)

BEARS RISE – Bearish sentiment, as measured by the American Association of Individual Investors (AAII), increased to 47.3% as of the latest release on February 13 — the highest level since November 2, 2023. The last time bearish sentiment was above 45% was April 2013 when the S&P 500 was within 1% of a 52-week high. (Source: Bespoke, AAII, Bespoke)

This Week in History

GPS LAUNCHED – On February 22, 1978, the U.S. Air Force launched Navstar 1, the world’s first operational Global Positioning System (GPS) satellite, from Vandenberg Air Force Base in California. GPS began as a military technology but expanded to transform industries from aviation to communications. GPS technology is an indispensable part of 21st-century life, powering everything from rideshare apps to fitness trackers to commercial aviation. The origins of GPS technology, however, lie in the early years of the Cold War space race. (Source: The Wall Street Journal)

Economic Review

• The preliminary “flash” S&P Global U.S. Composite Purchasing Managers Index (PMI) showed economic growth slipped again to start the year, falling to 50.4 from 52.7 the prior month. Wall Street was expecting an improvement to 53.2. Levels above 50 indicate economic expansion, while levels below 50 indicate contraction. The Manufacturing PMI did improve, rising to 51.6 from 51.2 the prior month, its highest level since June 2024, and exceeded expectations for 51.4. It was the second time manufacturing topped 50 after seven months in contraction. However, the Services PMI fell to 49.7 from 52.9 the prior month and was well short of expectations for a 53.0 reading. It was the first time the services sector was in contraction in two years. The service side of the economy — such as retailers, banks, and hospitals — employs most Americans and has driven the expansion since the pandemic. The S&P Global “flash” PMI surveys are among the first indicators of each month to give a sense of how well the U.S. economy is doing. “Optimism about the coming year slumped to its lowest since December 2022, except for last September, when business was unsettled by uncertainty ahead of the Presidential election. The deterioration in February was primarily a reflection of increased uncertainty about the business environment, especially in relation to federal government policies related to domestic spending cuts and tariffs,” S&P Global said.
• The Conference Board’s Leading Economic Index (LEI) slipped -0.3% in January to 101.5 from an upwardly revised +0.1% the prior month (originally reported at -0.1% which is where Wall Street forecasted it to remain this month). Breadth of the index slipped, with 4 of the 10 indicators tracking positive for the month, down from 5 the previous month. The decline was driven by lower Weekly Hours Worked in manufacturing, which plunged from +0.12% the prior month to -0.18% in January. Consumer expectations of future business conditions turned more pessimistic, while the components for ISM New Orders, Stock Prices, Building Permits, Capital Goods Orders, and Consumer Goods Orders all weakened. On the positive side, six-month growth rates were less negative, and the diffusion index improved. Also, the LEI Coincident Index improved by +0.3, its third straight monthly improvement, while the LEI Lagging Index rose by +0.5% and hasn’t declined in four months.
• The final reading of the February University of Michigan Consumer Sentiment Index dropped to 64.7 from the preliminary reading of 67.8 two weeks ago, where it was expected to remain. That was down from the final reading for January of 71.1. The Current Economic Conditions component fell to 65.7 from the initial estimate of 68.7 and is down from the prior month’s 69.3 final reading. The Consumer Expectations component was down to 64.0 from the initial estimate of 67.3 and the prior month’s final reading of 69.3. One-year inflation expectations were unchanged from the preliminary reading of +4.3%, as expected. The five-year inflation expectations level was +3.5%, up from the +3.3% initial estimate where it was the prior month as well.
• The New York Fed’s Empire State Manufacturing Index, a gauge of manufacturing activity in the state, rose 18.3 points in February to +5.7. This more than recaptured the -14.7 point decline in January and easily outperformed expectations for a flat (0.0%) reading. New Orders and Shipments both rebounded strongly, moving from negative territory to positive. However, forward looking indicators lost some strength with the index for Business Conditions Expected in Six Months slipping from a three-year high of +36.7 to +22.2 in February. Of concern, the inflation components accelerated even more with the Prices Paid indicator up +11.1 points to +40.2, the highest since March 2023, and the Prices Received indicator up +10.3 points to +19.6, also a noticeable increase.
• The Philly Fed Manufacturing Business Outlook Survey fell to +18.1 in February from an unrevised +44.3 the prior month which was its highest since April 2021. That was above estimates for a drop to +14.3. Readings above zero indicate economic expansion. The indexes for New Orders and Shipments both declined after sharp rises the prior month. New Orders fell to +21.9 from +42.9, while Shipments fell to 26.3 from +41.0. Unfilled Orders saw a big drop to +1.4 from +24.0 and Inventories were down to -0.4 from +11.7. Delivery Times rose to +12.4 from +6.8 and Prices Paid index moved higher to +40.5 from +31.9, while the Prices Received index inched up to +32.9 from +29.7.
• The National Association of Realtors (NAR) reported that Existing Home Sales fell -4.9% in January to a seasonally adjusted annual rate of 4.08 million units, below expectations for 4.13 million units and down from the 4.29 million units reported the prior month (revised higher from 4.24 million). Year-over-year existing sales were up +2.0%, down from +10.6% the prior month, which was the biggest annual gain since June 2021. The Median Existing Home Price declined to $396,900. Year-over-year, home prices were up +4.8% compared to +6.0 the prior month. The Inventory of Homes for Sale was up +3.5% from the prior month and +16.8% from last year, to 1.18 million units which is the highest level since October 2021. Unsold Inventory is at a 3.5-month supply, down from 3.8 months the prior month. Homes Listed for Sale remained on the market for 41 days on average, up from 35 days the previous month. First-Time Buyers were 28% of sales in the month, down from 31% the month before. Historically, these buyers make up closer to 40% of home sales, but affordability has been hit hard in the last two years due to fast-rising home prices and higher mortgage rates. All-Cash Sales rose to 29% of transactions from 28% the prior month. Homes sold above list price were 16%, down slightly from 18% a month ago. For the month, sales rose in all four regions: the Northeast was up +9.5%, the South was up +3.5%, the West was up +7.4%, and the Midwest was up +7.2%. 
• Homebuilder confidence plunged in January, as the National Association of Home Builders (NAHB) Housing Market Index (HMI) fell to 42, the lowest level in five months following the prior month’s unrevised reading of 47, which marked a 9-month high. That was well short of expectations for 46. A year ago, the index stood at 48. 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. President Trump’s tariffs on imported goods from Canada, China and Mexico are increasing the cost of building materials, which is spooking home builders. Although Trump has paused some of those tariffs, uncertainty over whether they will be reinstated is affecting how builders see the road ahead for the housing market. “With 32% of appliances and 30% of softwood lumber coming from international trade, uncertainty over the scale and scope of tariffs has builders further concerned about costs,” said Robert Dietz, chief economist at the NAHB. The Current Sales component fell -4 points to 47, while Sales Expectations in the Next Six Months dropped -13 points to 46, and Traffic of Prospective Buyers fell -3 points to 29. For the month, 26% of builders reported cutting home prices, down from 30% the prior month. The average price reduction was also unchanged, at 5%. The use of sales incentives beyond price cuts slipped to 59% from 61%.
• Weekly MBA Mortgage Applications fell -6.6% for the week ending February 14 following a +2.3% rise the prior week. The Purchase Index fell -5.9% after falling -2.3% the prior week. The Refinance Index was down -7.3% following the prior week’s +9.6% rise. The average 30-Year Mortgage Rate slipped to 6.95% from 6.97% the prior week.
• Weekly Initial Jobless Claims increased by -5,000 to 219,000 for the week ending February 15, slightly worse than expectations for claims of 215,000. The prior week was revised higher from 213,000 to 215,000. The number of people already collecting unemployment claims (i.e., Continuing Claims) rose by +24,000 to 1,869,000 in the week ending February 8, worse than expectations of 1,868,000 claims. Last week’s reading of 1,850,000 was revised lower to 1,845,000.

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.