February 10, 2025

“All intelligent investing is value investing. You must value the business in order
to value the stock.”

Charlie Munger

Well, its Valentine week, will the market show us some love? First last week, the week started replacing all the losses caused by the tough tariff talk the previous week only to give back some gains last Friday. But overall, we finished up. Here are the numbers, The S&P 500 finished up .94%, the Dow Jones Industrial average got to a little over even up.08%, the Nasdaq led last week up 1.60%. Internationally the FTSE 100 added .31% and the MSCI-EAFE gained .6%. The 2-year Treasury paid 4.291% and the 10-Year yield was 4.495%.

Also, today you are experiencing one of three emotions, Elation if your team won the Super Bowl, depression if they lost, or a general indifference because you really don’t care and think too many people put to much stock in the game. Regardless it is one of Wall Street’s favorite indicators for the coming year is tied to who won yesterday.  Just like Ground Hog Day, weather prognostications it is based upon perception over facts. So, the Eagles spanked the Chiefs but showed compassion by allowing the Chiefs to avoid humiliation in the 4th quarter, so if you believe the indicator 2025 may have some tough times.

That said, earnings and economic data will drive the market. Last week’s NFP report underscores the financial outlook for healthy conditions and expansion to continue. Inflation is unlikely to abate in this environment, and interest rates will not change, but it won’t matter if the S&P 500 continues to make money and pay its shareholders. We believe that inflation will continue to move lower as the labor market continues to weaken. This, in turn, could prompt the Fed to cut rates more than currently forecasted (two cuts expected in 2025). However, the impact of Trump’s economic agenda remains a wildcard, as its precise effects on inflation are uncertain.

So where was all the action? Except for Information Technology, all Select Sectors posted gains in January, led by Health Care and Financials. The contribution of cross-sector effects to total S&P 500® dispersion moved further above its long-term average in January, indicating strengthening relative rewards for sector weighting decisions. Dispersion decreased within most sectors, particularly for mid-cap Information Technology and large-cap Consumer Discretionary. Health Care Services and Internet were the leading industries for the month, rising 13.1% and 11.5%, respectively. Semiconductors was the smallest gainer, up 0.2% for the month. Dispersion among industry returns decreased slightly relative to the previous month.

What happened in the jobs market last week? According to Labor Department officials, the U.S. economy added 143,000 jobs in January, while the unemployment rate fell to 4%, indicating a slowing labor market that remains on solid footing. The Los Angeles wildfires and a particularly cold January in much of the country may have weighed on hiring to the tune of some 70,000 fewer jobs created than otherwise, according to Morgan Stanley economists. Job growth was mainly concentrated in the healthcare, retail, and government industries. Wages also exceeded expectations, with average hourly earnings rising 0.5% for the month and 4.1% year-over-year, surpassing projections. Economists had been expecting an overall healthy reading, with 169,000 net new jobs created in the month and the unemployment rate holding steady at 4.1%. The January report, which effectively closes the book on the Biden-era job market, with December revisions demanding attention. Overall, economists see no cause for concern about the economy, suggesting the Fed is unlikely to cut interest rates anytime soon.

Any concerns? The University of Michigan’s gauge of consumer sentiment fell to 67.8 in a preliminary February reading, down from 71.1 in the prior month and the lowest reading since July. Economists polled by the Wall Street Journal had expected sentiment to rise to a reading of 74 in February. Another key part of the report is the University of Michigan’s measure of inflation expectations. According to the report, Americans’ expectations for overall inflation over the next year jumped to 4.3% in February from 3.3% in the prior month. That’s highest level since November 2023, and it is only the fifth time in 14 years that there has been a one-month gain of that size. Economists said the drop in confidence this month almost certainly reflects President Donald Trump’s threats of tariffs on Canada, Mexico and China. Which obviously has successfully worked itself out since the survey.

And Real Estates latest? Some bad news, Market Watch reports, a rising number of homeowners, particularly first-time home buyers and military members and veterans, are missing their monthly payments — and one group says it could be the “canary in the coal mine.” In 2024, the share of serious delinquencies — which refers to mortgage loans that are over 90 days past due but are not in active foreclosure — rose to the highest level in nearly two years, according to a monthly report by Intercontinental Exchange, or ICE. Delinquencies on Federal Housing Administration loans, typically used by first-time home buyers, rose 74 basis points in 2024. A basis point is one-hundredth of a percentage point. The good news, in contrast, the seriously delinquent rate for conventional loans rose 2 basis points over the span of one year. The ICE data also showed relative strength among homeowners with conventional mortgages, or those who have bank-owned mortgages. The share of them that fell behind on their mortgage payments decreased in 2024 compared to the year before.

Back to the market going forward, and forgive me for getting into the ‘technical weeds” a little, but Bank of America’s sell side indicator, tracks average recommended equity allocations by Wall Street strategists. In January, that indicator climbed to 57%, the highest since early 2022 and a mere 1 percentage point shy from a sell signal, Savita Subramanian, equity and quant strategist, and her colleague Victoria Roloff, told clients in a note.

In other words, when so many strategists are saying buy stocks, the best plan of action may be to not follow the herd. When the indicator has been at the 57% level or higher, returns for the next 12 months were positive 65% of the time versus 82% overall, meaning the bullish sentiment is alive and well.

Mike