February 24, 2025

“Risk comes from not knowing what you are doing”

Warren Buffett

Markets were in risk-off mode in the wake of a wave of economic data that showed cracks in key parts of the economy. Bond yields were falling, and the only major S&P sector on the rise was consumer staples, but first, here are the numbers for the week. The S&P 500 lost 1.67%, the Dow Jones Industrial Average surrendered 2.89%, The Nasdaq followed off 2.17%. Internationally, the FTSE 100 was down .84% and the MSCI-EAFE off a slight.30%. The 2-year slipped to a yield of 4.2% and the 10-year paid 4.431%.

So, what happened? Well, the markets started the week on an upswing hitting new highs but turned sour on Thursday and Friday ending the week with The Dow Jones Industrial Average dropped 750 points, or 1.7%, last Friday. The S&P 500 also fell 1.7%. Both marked their biggest declines since Dec. 18. The Nasdaq Composite slid 2.5%. However, as Barron’s Conner Smith reports, Markets are priced for good news, with the S&P 500 closing at a record as recently as Wednesday. Frank Cappelleri, founder of technical analysis firm CappThesis, points out that the S&P hadn’t fallen 1% or more since Jan. 27. “A session like this was bound to happen,” Cappelleri told Marketwatch. “Buyers stepped in early yesterday to limit the damage, but the lack of upside follow-through this morning allowed sell-side momentum to take over.” After two years of blockbuster gains, it is understandable that investors might want to weigh the risks of getting in now against waiting for a pullback. As they like to say on Wall Street, “trees don’t grow to the sky” — meaning that nothing rises in a straight line forever. “Whether the last 2.5 months are a consolidation phase within an ongoing cyclical bull, or the start of a bear market, depends on inflation, earnings, and other factors,” said Ed Clissold, chief U.S. strategist at Ned Davis, in a report shared with MarketWatch. “Currently, they support the argument that it is a bull market until proven otherwise.”

In other bad news good news, A survey from the University of Michigan found that consumer sentiment has dropped and consumers have increased their inflation expectations on tariff worries. Other economic data released Friday raised investor concerns over a decline in U.S. services activity in February. However, a survey of Fortune 500 CEO’s indicated good optimism for profitability going forward for increased profitability, which will bolster stock prices.

What about egg prices? Carl Wienberg, chief economist at High Frequency Economics, said it may be months before prices come down. “It takes about five months for a fertilized egg to hatch and mature into a laying hen. Until then, egg prices will remain high,” Weinberg said in a note to clients. So, I guess we will eat pancakes instead.

And Gas prices? President Donald Trump announced last week that he will be working with Republicans in Congress to ease the pain at the pump felt by Americans, as global uncertainty and seasonal trends continue to force gas prices higher, the Daily Mail reported. If the production of oil in the U.S. increases from more drilling and fewer restrictions, it will almost certainly mean a reduction in the cost of oil because the growing supply side of market forces will push prices down. This, in turn, could bring down the price of gas at the pump, as gas prices are largely determined by global crude oil prices. Trump also promised to increase the Strategic Petroleum Reserve. “The world runs on low-cost energy, and energy-producing nations like us have nothing to apologize for,” he said, adding that the U.S. has “more energy than any other nation in the world, and we’re going to use it.”

How about interest rates? Traders see a 63.7% chance of an interest-rate cut from the Federal Reserve in the first half of the year, according to the CME FedWatch Tool. That’s up from 50.4% a week ago. The Federal Reserve released the minutes from its January rate-setting committee meeting today. And to the market’s relief, the minutes contained nothing surprising or unexpected, helping propel the S&P 500 to its second record close in a row last Wednesday. But last Thursday it began to rain.

The next FOMC meeting is scheduled for March 19, and investors see a roughly 98% chance of rates staying the same, according to the CME Group’s FedWatch tool. Odds for a cut in May are also low at 12%, but spike to just under 50% for the June meeting. We’ll soon see how much waiting markets are willing to tolerate.

Real Estate any better? No, Existing-home sales fell in the first month of the year as buyers continued to struggle with high home prices and 7% mortgage rates. Home sales fell 4.9% in January to a 4.08 million pace. That’s the number of homes that would be sold over an entire year if sales took place at the same rate in every month as they did in December. The numbers are seasonally adjusted.  The median home price for the month was the highest on record, at $396,900, according to the National Association of Realtors, which released the data. Home sales in January were up 2% from the same month a year ago. “Housing affordability remains a major challenge,” Lawrence Yun, chief economist at the NAR, said in a press release. The 30-year mortgage rate averaged 6.85% as of Feb. 20, according to Freddie Mac. The U.S. housing market has been in a sales slump dating back to 2022, when mortgage rates began to climb from pandemic-era lows. Sales of previously occupied U.S. homes fell last year to their lowest level in nearly 30 years. The average rate on a 30-year mortgage briefly fell to a 2-year low last September, but has been mostly hovering around 7% this year. That’s more than double the 2.65% record low the average rate hit a little over four years ago.

Next week could be a volatile one for the S&P 500. The market faces earnings reports from numerous retailers and a critical economic release due Friday. The January read of the PCE price index is due and likely to confirm sticky inflation. The market could enter a correction in this scenario due to the impact on the FOMC rate reduction timeline. The FOMC is expected to lower interest rates, but the timing is uncertain and may not be until 2026.

So, strap in as we expect some fireworks but overall good progress on several pro-business policies will begin to pay dividends. We still maintain a bullish outlook for the year.

Mike