January 13, 2025

“Buy not on optimism, but on arithmetic”

Benjaman Graham

Last Week was a bit depressing as we entered a correction mode, here are the numbers. The S&P 500 lost 1.09%, the Dow Jones Industrial Average surrendered 1.31% the Nasdaq fell 1.21%. Internationally the FTSE managed a slight gain of .30% and the MSCI-EAFE .22%. The 2-Year Treasury paid 4.384% and the 10-Year yield was 4.763%.

So, what happened last week? From Market Beat: Equity markets pulled back on Friday after a hot jobs report cemented the idea that the Federal Open Market Committee (FOMC) will not cut interest rates in 2025 into the market’s mind. The data was more than double the forecast, compounded by lower unemployment and rising wages. The takeaway is that the FOMC’s labor market mandate is covered, leaving it to deal with inflation, which isn’t tamed. Inflation cooled from its peak but remains hot and has been accelerating in recent months. Next week’s market hurdle is inflation data and results from big banks like JPMorgan Chase. Big banks are expected to grow earnings by high-double-digits, and inflation data isn’t likely to cooperate with a lower interest rate scenario. Analysts expect consumer-level inflation to rise by 0.3% in December, driving another 3.3% Year over Year increase in core CPI.

Market Watch reports that investors are starting the week still in a cautious mood. The S&P 500 SPX sits 4.3% below its record closing high in early December. Surging Treasury yields amid revived inflation concerns seem to be taking much of the blame. However, according to Keith Lerner, chief market strategist at Truist Advisory Services, such pullbacks may be uncomfortable “but are the admission price to the market.” Lerner believes the latest selloff represents no more than a reset of prices and sentiment, both of which may have become stretched on a short-term basis but still leaves stocks within the boundaries of an ongoing bull market. The record levels of investor optimism seen late last year — including a very high percentage of traders expecting stocks to reach new peaks in coming months — left the market vulnerable. “When expectations are high, a little bad news can go a long way,”. But the important thing for investors to remember is that the spike in interest rates mainly reflects recent better-than-expected economic data — like Friday’s blowout jobs report. “Our long-held view remains that we would prefer a stronger economy with fewer rate cuts than a weaker economy that requires more aggressive rate cuts. One only needs to look back to 2000 or 2008, where aggressive rate cuts did not stem bear markets or recessions,” says Lerner. As Barrons reports, It’s a good time to be a big bank right now-at least that’s how it seems. Interest rates look like they’ll stay higher than anticipated, and President-elect Donald Trump, who is eager to slash regulation and cut corporate taxes, is due to take office in a week.

Yet earnings Wednesday from JPMorgan Chase, Goldman Sachs, Citigroup, and Wells Fargo will reveal a far broader economic story. They will also be packed with interesting data for the Federal Reserve to analyze as it decides how much to cut interest rates over the next few months—if at all.

More bad news for homebuyers, again from Market Watch, “most economists were expecting mortgage rates to fall over the course of the coming year. But rates have risen steadily over the last month, inching back up to 7% — and they’re expected to move even higher in the coming weeks. Blame the strength of the U.S. economy, experts say: The stronger the economy is, the less likely the Federal Reserve will be to cut interest rates, because the economy doesn’t seem to need support in the form of lower borrowing costs.”

As this is the last week of the Biden administration, which is attempting to rush through anything it can to hamper the new administration, coupled with the fact of the disaster in southern California where wildfires, as I write these words, still are burning out of control. All of this will offer additional economic challenges going forward. The good news is maybe, despite the blame game that will follow, will change enough opinions about more sane environmental policies in a disaster-prone region.

That said, we expect economic growth to stay resilient, supported by consumer spending and potential tax cuts. A healthy labor market should further support the economy U.S. exceptionalism, (meaning the US Market is still the place to be) is forecast to continue, cementing our overweight to this space. Still, high valuations and a concentration in tech stocks make select exposure abroad prudent so we expect to add to large cap.

Mike