March 3, 2025

“In all my 55 years on Wall Street, before I retired to do something vastly more important, I was never able to say when the market would go up or down. Nor was I able to find anybody on Earth whose opinion I would value about when it would go up and down.”

Sir John Templeton

Well, this week certainly validates that position, but first here are the numbers. The S&P 500 finished the week off 1.20%. The Dow Jones Industrial Average managed a gain of .80%, while the Nasdaq failed to recover losing 3.80%. Internationally, the FTSE 100 shined, up 1.74%, and the MSCI-EAFE was flat ending where it started. The 2-year Treasury yield closed at 3.98%, and the 10- Year paid 4.203%.

So, last week was quite the one for the history books as the Ukrainian president seemed to think he could rollover President Trump as he had with President Biden. The ensuing fireworks that followed were one for the ages. It also caused the market to make several knee jerk reactions but at the end of the week all the major markets had huge days in the right direction. As Barron’s reported “Stocks briefly turned negative after the meeting, a not surprising reaction to global instability. But then investors seemed to reconsider. Perhaps it was a sudden desire to buy the dip after days of declines. Perhaps it was trades programmed for the last hours of February. Or maybe investors saw a quicker path to peace in Ukraine, even if it that now meant a one-sided deal. Whatever happened, the S&P 500 rallied into the close Friday, for its best day in six weeks. The large-cap index rose 1.6%, with every sector in positive territory. The tech-heavy Nasdaq Composite also gained 1.6%. The Dow Jones Industrial Average finished the day up 601 points, or 1.4%.” up until last week, U.S equity markets were buffeted by several headwinds in February, including potential impending tariffs, geopolitical tensions, economic weakness, and a decline in consumer confidence, with the S&P 500® closing the month down 1%. Despite reaching two all-time closing highs, gains were quickly erased, followed by a rally for the S&P 500™ on the final trading day of the month. Mid and small caps fared worse than their large-cap peers, with the S&P MidCap 400® and S&P SmallCap 600® falling 4% and 6%, respectively. Heightened inflation concerns and uncertainty regarding potential Federal Reserve rate cuts continued to weigh on investor sentiment. Sector performance in February was mixed. Defensive sectors outperformed, led by Consumer Staples and Real Estate, while Industrials, Communication Services and Consumer Discretionary lagged.”

And Inflation? Investors spent last Friday morning digesting the release of the latest personal consumption expenditures, or PCE, price index, which rose 2.5% in January from a year earlier. The inflation measure, which is closely watched by the Federal Reserve, matched economists’ forecast and indicated a slight slowing from December’s pace. The annual rate of so-called core inflation in the fourth quarter, meanwhile, was raised to 2.7% from 2.5%. The core rate omits food and energy and is seen as a better predictor of future inflation. That’s good news.

However, consumer spending also slowed 0.2%, despite a rise in income during the month. “The January retail sales report showed a larger than expected pullback in spending at the start of the year as consumers took a breather after the holiday shopping season,” wrote Lydia Boussour, senior economist at EY. “Retail sales figures tend to be volatile at the turn of the year. Looking through the noise, the consumer picture still looks fundamentally healthy though we expect spending momentum will cool further as softer labor market conditions, still elevated prices and rates constrain households’ spending power.” Economists had been preparing for a softer report in January, predicting that consumers would pull back after splurging during the holidays.

Economic growth? GDP is the official scorecard of sorts for the economy. The U.S. grew rapidly in both 2023 and 2024 despite persistent inflation and higher interest rates and there’s little sign of a broad slowdown underway. The US economy grew at an unrevised 2.3% annualized pace last quarter, on par with consensus estimates. The Bureau of Economic Analysis’s (BEA) second estimate of fourth quarter US gross domestic product (GDP) was unchanged from the advanced estimate, which had shown 2.3% annualized growth. The second estimate, based on more complete source data than the advanced estimate, suggests that economic growth in the fourth quarter was slower than the 3.1% annualized growth seen in the third quarter. The increase in real GDP in the fourth quarter primarily reflected increases in consumer spending and government spending that were partly offset by a decrease in investment, according to the BEA. A third and final estimate for Q4 GDP growth will be released at the end of March. In short, the economy is prodding along.

Do you ever wonder why tariffs are taking a lead role in economic negotiations? The U.S. trade deficit in goods exploded to a record high in January as businesses raced to acquire foreign goods ahead of new tariffs. The trade gap widened by 25.6% to a record $153.3 billion, according to the Commerce Department’s advanced estimate released Friday. President Trump has said he will raise China tariffs by another 10 percentage points next week. He has shown no sign of pulling back on threats to hit Mexico, China and other trading partners with substantial new tariffs. Imports of goods surged 11.9% in January to $325.4 billion. All major categories showed gains but a large percentage came from imports of industrial supplies.

U.S. exports rose 2% to $172.2 billion in December. A strong dollar, which makes American goods more expensive, and a weak global economy has weighed on shipments. That’s why.

Going forward, Vanguard suggests the outlook for U.S. fixed income improved in the fourth quarter as intermediate- to long-term interest rates surged. Wage growth does not appear to be an impediment to inflation returning to the Fed’s 2% target, as productivity gains have risen toward historical highs. Vanguard analysts still expect the Fed to cut rates twice in the second half of the year—a deferral from their previous forecast of rate cuts in the first half. We expect the year to end positive with US Value and Small Cap the place to be, with a dose of Global equities.

As for real estate, this week the National Association of Realtors will also release its Pending Home Sales Index for January. That will tell us how housing is doing.

Mike