Weekly Market Update – January 31, 2025

Quick Takes

• The major indexes missed closing positive for a third straight week as Chinese AI competition, a hawkish Fed statement and press conference, as well as a late Friday announcement of tariffs being placed on Canada, Mexico, and China sent stocks down.
• The U.S. dollar rebounded from its worst week since November 2023 (a drop of -1.7%) with a +0.9% rally. But that and the trade tariffs didn’t prevent non-U.S. stocks from advancing. The MSCI EAFE Index was up +0.8% and the MSCI Emerging Markets Index was up +0.3%.
• U.S. Treasury yields were down marginally, with 10-year U.S. Treasury yield dropping -8 basis points to finish the week at 4.54%. The Bloomberg U.S. Aggregate Bond Index saw a modest +0.4% gain, but the Bloomberg Global Aggregate ex U.S. Bond Index slipped +0.2%.

Source: Bloomberg. Data as of January 31, 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.

A topsy-turvy week saw stocks slip while bonds got a bump

Wall Street closed out a bumpy week as corporate earnings, competition in Artificial Intelligence (AI), and tariff turmoil made for choppy trading. The S&P 500 Index finished the week down -1.0% after two straight weeks of gains. The small cap Russell 2000 Index was the better performing U.S. index, but still fell -0.9%. The Nasdaq Composite Index, with a heavy Technology weighting, fell the hardest, dropping -1.6%. The S&P 500 Information Technology sector sank -3.6% for the week after an unexpectedly strong performance by Chinese AI startup DeepSeek had investors questioning the rich valuations of the sector. The performance of DeepSeek’s purported low-cost, open-source, large language model presented a reality check for mega-cap U.S. firms that have spent billions on AI infrastructure and chips. In fact, the news led the shares of NVIDIA to sink nearly -17% on Monday. Several positive earnings surprises and upbeat forward guidance from notable mega-cap tech companies like Meta Platforms (Facebook), Microsoft, and Apple helped the sector recover later in the week. On Wednesday, the Federal Reserve (Fed) concluded its first policy meeting of 2025 by holding its policy rate range unchanged, as was widely expected. However, a hawkish statement and press conference following the rate decision took some more wind out of the sails of investors. Fed Chair Jerome Powell stated that the Fed does “not need to be in a hurry to adjust” its policy stance and that it would need to see real progress on inflation or weakness in the labor market before making another rate cut. And on Friday afternoon, tariff talk shook investors again. Stocks were on their way to a strong Friday, and on the path for a third consecutive week of gains, when the White House confirmed that, starting Saturday, a 25% tariff would be applied to goods from Mexico and Canada and a 10% tariff would be placed on goods from China. The major indexes reversed from positive territory at the time and continued falling into the close. 

Despite the U.S. dollar rebounding +0.9% from its worst week since November 2023 (down -1.7%), plus the focus on tariffs at the end of the week, developed market international stocks (as measured by the MSCI EAFE Index) were able to gain +0.9%. Emerging market stocks (the MSCI Emerging Markets Index) were up a more modest +0.3%. Most major European markets saw decent gains for a second straight week, with the STOXX Europe 600 Index up +1.8% for the week. France’s CAC 40 Index rose +0.3%, Germany’s DAX gained +1.6%, the U.K.’s FTSE 100 Index climbed 2.0%, and Italy’s FTSE MIB added +0.8%. In Asia, Japan’s Nikkei 225 Index fell -0.9% but the broader based TOPIX Index was up +1.4%. Chinese stocks only traded on Monday with the Shanghai Composite Index declining and markets have been closed since for the Lunar New Year holiday. They reopen February 5. 

U.S. Treasury yields were down marginally, with the 10-year U.S. Treasury yield off -8 basis points to finish the week at 4.54%. The Bloomberg U.S. Aggregate Bond Index saw a mild +0.4% gain, while non-U.S. bonds, as measured by the Bloomberg Global Aggregate ex U.S. Bond Index, slipped -0.2% for the week.

The Week Ahead

The calendar is chock full of data again this week with Friday’s employment report for January from the Bureau of Labor Statistics (BLS) taking the spotlight. The BLS will also provide the Job Openings and Labor Turnover Survey (JOLTS) for December as an initial look at employment Tuesday. Other economic data to watch next week includes the Institute for Supply Management’s Manufacturing Purchasing Managers’ Index (PMI) for January on Monday, followed by the Services PMI on Wednesday. On Friday, the University of Michigan will release its Consumer Sentiment Index for February. Outside the U.S., Wholesale Inflation in the European Union will be released on Wednesday, followed by Retail Sales on Thursday.

Earnings season will heat up with roughly 25% of S&P 500 companies scheduled to report during the week. Monday brings notable names Palantir Technologies and Tyson Foods. On Tuesday Advanced Micro Devices, Alphabet, Chipotle Mexican Grill, PayPal Holdings, PepsiCo, Pfizer, and Spotify Technology all report. On Wednesday, Arm Holdings, Ford Motor, Novo Nordisk, Qualcomm, Uber Technologies, and Walt Disney release earnings. Amazon.com, ConocoPhillips, Eli Lilly, Expedia Group, Honeywell International, Linde, and Philip Morris report on Thursday, then Cboe Global Markets and FirstEnergy go on Friday.

Chart of the Week

The cost of goods and services rose for the fourth straight month in December, with the Personal Consumption Expenditure (PCE) Deflator (aka PCE Price Index) up +0.3%. That marks the biggest increase since last April, but matched what Wall Street was expecting and compares to an unrevised +0.1% the prior month. On a year-over-year basis, the PCE Price Index was up to a 7-month high of +2.6%, but also in line with expectations and an acceleration from the +2.4% annual rate the prior month. The Core PCE Price Index, which excludes food and energy and is the Fed’s preferred inflation gauge, rose by +0.2% for the month, matching expectations and up from +0.1% the prior month (unrevised). Year-over-year, the Core-PCE Price Index was unchanged at +2.8%, where it was expected to come in. With inflation stubbornly above the Fed’s +2.0% target rate, on Wednesday they left its benchmark short-term interest rate unchanged. But importantly, the core inflation rate did not rise, and as shown in the chart below, the 3-month, 6-month annualized trends are not too far above the Fed’s target rate. Core prices are down to +2.3% on a 6-month annualized rate, the lowest in 2024, and the 3-month annualized rate dropped to +2.2% from +2.6% in November. 

Headline PCE Inflation was higher but Core PCE Inflation Ticked Down

Core Personal Consumption Expenditures (PCE) Price Index

Note: Core PCE excludes food and energy items
Source: Commerce Department, The Wall Street Journal.

Did You Know?

EFTs BETTER – Analysis by Bank of America (BoA) shows that annual all-in costs for ETFs are -1.2% lower than mutual funds. BoA estimates that ETFs have helped save investors $250 billion in taxes, even when accounting for the 57% of mutual funds currently held in tax-sheltered accounts by U.S. households. (Source: Bank of America)

SICK EGGS – A bird flu outbreak halted all poultry activities in Georgia in mid-January, sending wholesale egg prices soaring to more than $6/ dozen across the country. At the end of October, a dozen USDA large eggs delivered to warehouses cost $3.02, or less than half the $6.14 cost on 1/17. (Source: USDA)

FOR THE DOGS – With a median annual salary of $140k, job posting platform Indeed ranked veterinarians as the top job for 2025. Job postings for veterinarians have increased +124% since 2021, and the Bureau of Labor Statistics (BLS) projects that demand for jobs in this role will grow another +19% over the next nine years. (Source: Indeed, BLS)

This Week in History

LORDY, LORDY LOOK WHO’S 40 – On January 31, 1985, the Nasdaq-100 Index began tracking 100 of the largest, non-financial companies listed on the Nasdaq Stock Market. Over the past four decades the Nasdaq-100 has had over 500 member companies, but only six original members still remain in the index today: Apple, Micron Technology, Intel Corporation, KLA Corporation, PACCAR, and Costco Wholesale Corporation. The technology-dominated index has returned (including dividends) over +21,100% since its inception, or about +14% annualized. (Source: CNBC, Bloomberg)

Economic Review

• The U.S. economy moderated but remains solid with real Gross Domestic Product (GDP) expanding at a +2.3% pace in the fourth quarter, according to the initial estimate. That was below the +2.6% growth Wall Street expected and is down from the +3.1% pace in the third quarter. Yet the headline number was depressed by slower production of Inventories, or unsold goods, which is a very volatile category that reduces GDP. The growth in inventories slowed by -$53.5 billion and subtracted almost a full percentage point from headline GDP. The big driver of economic growth has been the U.S. consumer, and Personal Consumption rose at a sharp +4.2%, up from +3.7% the prior quarter, and was the strongest gain in almost two years. On the other hand, Business Investment fell for the first time in two years and put the spotlight on an ongoing slump among U.S. manufacturers. Government Spending rose +2.5%, a slowdown from the +5.1% the prior quarter, but still adding +0.4 percentage points to GDP. For the full year, GDP registered a strong +2.8% advance — well above what economists believe is the top sustainable speed. GDP also rose 2.9% in 2023 and 2.5% in 2022, a noteworthy streak that shows the resilience of the economy in the aftermath of the pandemic.
• The Conference Board’s Consumer Confidence Index retreated to 104.1 in January, down from 109.5 the prior month (which was revised up from 104.7). That was below Wall Street expectations for a decline to 105.7. A postelection pop in confidence dissipated the last few months. The Present Situation gauge slipped to 134.3 from 144.0 (revised up from 140.2). The Expectations gauge — which reflects consumers’ six-month outlook — dropped to 83.9 from 86.5 the prior month (revised up from 81.1). Levels below the 80 mark on the expectations index often signal a recession within the next year. In good times, the index can top 120 or more. “Consumer confidence has been moving sideways in a relatively stable, narrow range since 2022. January was no exception. The Index weakened for a second straight month, but still remained in that range, even if in the lower part,” said Dana M. Peterson, Chief Economist at The Conference Board. 
• The Commerce Department reported Durable Goods Orders for long-lasting items such as televisions, appliances, and transportation equipment fell -2.2% in December, far below the +0.6% increase expected. That follows a -2.0% slide the prior month (revised down from the initial -1.2% dip). It’s the fourth decline in the last five months and was largely driven by automobiles and planes again. Durable Goods Orders Excluding Transportation were actually up +0.3%, matching expectations and up from an unrevised -0.2% the prior month. Also positive, the important Core Capital Goods Orders (capital goods excluding volatile sectors like transportation and defense), a proxy for business spending, was +0.5%, beating expectations for +0.3%. That follows a +0.9% rise the prior month (revised sharply higher from +0.4%). That was the biggest gain in 15 months. Core Capital Goods Shipments, which are factored into GDP, rose +0.6%, beating expectations for a +0.2% increase and up from +0.5% the month before (revised higher from +0.4%). New orders for transportation equipment dropped -7.4% following a -5.4% decline in November, paced by a -45.7% decline in new orders for nondefense aircraft and parts. Year-over-Year, durable-goods orders have fallen -3.8%.
• The Employment Cost Index (ECI) edged up to a seasonally adjusted +0.9% in the fourth quarter. That was in line with expectations and up a tick from an +0.8% unrevised rate of the third quarter. The ECI is the Federal Reserve’s preferred measure of wage gains. Year-over-Year the index decelerated slightly to a seasonally adjusted +3.8% from a +3.9% annual rate the prior quarter. That is the third straight quarter of the annual rate declining and the slowest annual rate since the third quarter of 2021. Still the Fed wants to see costs slow even further. Wages and benefits rose an average of +2.7% a year in the three years prior to the pandemic. Wages and Salaries account for about 70% of compensation costs. The annual Wages and Salaries rate fell to 3.8%, down from 3.9% the prior quarter and the lowest annual rate since the second quarter of 2021.
• The Federal Reserve Bank of Chicago reported that U.S. economic activity improved in December for its first positive reading since May. The Chicago Fed National Activity Index (CFNAI) rose to +0.15 from -0.01 the prior month (which was revised up from the originally reported -0.12). That is slightly better than expectations for a -0.06 reading, but far below the recent February high of +0.35. Readings below zero indicate below-trend-growth in the national economic activity. The CFNAI three-month moving average increased to -0.13 from -0.26 the month before, the highest reading since July 2024, but remains well off the low of -0.35 in December 2022. During the last 20 years, there has been a 91% correlation between the three-month index level and the quarterly change in real GDP. Two of the four broad categories of indicators used to construct the index improved from the prior month, and two were in positive territory. The Production and Income category contributed +0.19, up from 0.03 the prior month, and drove nearly all of the month’s overall gain. The Employment, Unemployment, and Hours category contributed +0.01, unchanged from the prior month. The Personal Consumption and Housing category contributed -0.02, down -0.01 from the prior month. The Sales, Orders, and Inventories category contribution was -0.02, up +0.03 from the prior month. Overall breadth of the index was improved with 44 of the 85 individual indicators making positive contributions, an improvement from just 36 the prior month. The improvement was broad-based with 54 indicators improving sequentially while 30 deteriorated and 1 was unchanged.
• Personal Spending rose +0.7% in December, above expectations for +0.5% and up from +0.6% the prior month (revised higher from +0.4%). After adjusting for inflation, Real Personal Spending was up +0.4%, a tick above expectations for +0.3% but down from +0.5% the prior month (revised higher from +0.3%). Meanwhile, Personal Income rose +0.4%, matching expectations and up from an unrevised +0.3% the prior month. The Personal Savings Rate slipped to +3.8% from +4.1% the prior month. The bottom line is that consumer spending is strong, and inflation remains sticky, which is why the Fed said it isn’t in a hurry to adjust its policy stance.
• According to the U.S. Bureau of Economic Analysis, the advance U.S. Trade Deficit shot up +18% in December to -$122.1 billion, the second largest deficit ever. That is worse than Wall Street expectations for a -$105.5 billion deficit and up from -$103.5 billion the prior month (revised from -$102.9 billion). Smaller trade deficits help contribute to economic growth, while larger deficits inhibit growth. For calendar year 2024, the U.S. recorded a record -$1.2 trillion trade deficit, surpassing the previous record set in 2022. Imports were the primary contributor to the wider deficit as businesses rushed to bring in imported goods ahead of potential tariffs. Imports rose +3.9% to $289.6 billion from $278.8 billion the prior month. Exports fell +4.5% to $167.5 billion from $175.3 billion the prior month.
• The Chicago Purchasing Managers Index (PMI), a barometer for the Chicago region’s business and manufacturing conditions (also known as the Chicago Business Barometer), improved to 39.5 in December from an unrevised 40.2 the prior month. That was just below Wall Street expectations for a 40.0 reading. Readings below the 50 level indicate contraction. This was the first increase after three consecutive monthly declines; however it remains in contraction territory for the 13th consecutive month. Three components rose as New Orders rebounded +13.8 points (more than reversing the prior month’s decline and putting it at the highest level since September 2024), Production expanded +4.0 points, and Inventories expanded +14.9 points (returning to expansionary levels for the first time since November 2023 after four consecutive months of decline). On the negative side, Supplier Deliveries more than reversed the prior month’s gains falling -13.5 points (it was its largest monthly fall since February 2008 and hit its lowest level since August 2023), Employment dropped -9.0 points (to its lowest level since June 2020), Order Backlogs slipped -0.8 points, while Prices Paid eased -2.7 points (the fourth successive fall and the lowest level since July 2024).
• The Texas Manufacturing Outlook Survey showed Texas factory activity in January rose to the highest level since October 2021 with the General Business Activity index up to +14.1 from an unrevised +4.5 the prior month, revised higher from +3.4 and handily beating expectations for a flat (0.0) reading. Underlying details showed strength with 13 of the 14 indicators improving for the month. The Production index, a key measure of state manufacturing conditions, rose to +12.2 from +5.3 last month. The New Orders index shot up to +7.7 from +1.5. Shipments jumped to +8.7 from +0.7. The Company Outlook index hit +18.7, up from +12.3, and its fourth consecutive positive month. Employment rose marginally and Wages and Benefits increased more. Prices Paid and Prices Received both rose moderately. Indicators of conditions six months from now advanced significantly and are now well above their customarily optimistic levels. The Texas Service Sector Outlook Survey declined for the month, sliding down to +7.4 from +10.8 the prior month (which was revised higher from the originally reported +9.6).  
• The Richmond Fed Manufacturing Survey improved but remains in contraction territory (below zero), coming in at -4 in January from -10 in the prior month where it was expected to remain. All three component indexes improved but two remain in contraction territory. The Shipments component ticked up +2points to -9. The New Orders index rose +7 points to -4. The Employment index jumped +11 points to +3. The future indexes for shipments and new orders also increased further into positive territory, suggesting that many firms expected improvements in the next six months.  The Richmond Fed Service Sector Survey decreased to +7 from +14 the prior month. 
• According to the Case-Shiller S&P CoreLogic 20-City Home Price Index, the pace of U.S. housing prices quickened in November and marked 22 straight monthly increases and a new record high price level. Home prices in the 20 biggest U.S. metropolitan areas increased a seasonally adjusted +0.41%, above expectations for a +0.30 increase and up from a +0.35% increase the prior month (revised up from +0.32%). On a year-over-year (YoY) basis, the 20-city index was up +4.33%, above expectations for +4.24% and up from the prior month’s +4.23% annual pace (revised higher from +4.22%). New York remained in the top spot over Chicago with the biggest year-over-year home-price gains (up +7.3% and +6.2% respectively). Tampa and Denver remain at the bottom of the list of annual gains (at -0.37% and +0.89% annual rates respectively).  
• The competing Federal Housing Finance Agency (FHFA) House Price Index (HPI) also showed U.S. home prices moved up in November, as the government agency reported prices rising +0.3% after moving up +0.5% the prior month (revised higher from +0.4%). It was the 6th month of increases. The government data showed home prices up +4.2% year-over-year, the same annual rate from the prior month. House prices were up YoY in all of the 9 regions, with the highest rate in New England (+7.7%). Even with poor affordability and still-high mortgage rates, the dearth of housing supply continues to push up house prices.
• The Commerce Department reported New Home Sales jumped +3.6% in December to a rate of 698,000 units after the prior month’s +9.6% jump, or a 674,000 units annual rate, revised up from +5.9%. That was ahead of expectations for a +1.7% increase to a 675,000 unit annual rate. New Home Sales data tend to be volatile month-on-month and are often revised. New-home sales remain far below the recent peak of over 1 million units in August 2020. Year-over-year, sales of new homes were up +6.7% compared to +10.3% the prior month. By region, month-over-month sales were up +41.2% in the Northeast and +20.3% in the West, while down -3.3% in the Midwest and -2.1% in the South. The Median New Home Price rose +2.1% year-over-year to $427,000 from $425,600 the prior month. The months of supply at the current rate of sales was 8.5, down from 8.7 the prior month. The inventory of new homes for sale fell -3.8% after rising +6.8% the prior month. The months of supply at the current rate of sales was 8.5, down from 8.7 the prior month.
• The National Association of Realtors (NAR) reported that Pending Home Sales fell in December after four straight months of rises, down -5.5% compared to last month’s +1.6% increase (revised down from +2.2%), which was well short of Wall Street expectations for a flat (0.0%) month. Year-over-year sales were down -2.9%, below the +4.2% gain expected and down from the +4.9% annual pace the prior month (revised lower from +5.6%). From a regional perspective, all four regions fell from the prior month. The South fell the least with a -2.7% decline, the Midwest was down -4.9%, the Northeast dropped -8.1%, and the West sank -10.3%.
• Weekly MBA Mortgage Applications were down -2.0% for the week ending January 24 following a +0.01% uptick the prior week. The Purchase Index inched up -0.4% after inching up +0.6% the prior week. The Refinance Index fell -6.8% following the prior week’s -2.9% dip. The average 30-Year Mortgage Rate remained at 7.02% for a second straight week.
• Weekly Initial Jobless Claims fell -16,000 to 207,000 for the week ending January 25, better than expectations for claims of 225,000. The prior week was unrevised. The number of people already collecting unemployment claims (i.e., Continuing Claims) fell -42,000 to 1,858,000 in the week ending January 18, better than expectations of 1,902,000 claims. Last week’s reading of 1,899,000 was revised higher to 1,900,000.

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.