Market Commentary | March 10th, 2025

by lportee53 | Mar 10, 2025 | Market Commentary

Week in Review…

Market indices closed the week lower as markets grappled with the timeframe surrounding tariffs and possible labor market softening.

The S&P 500 declined by –3.50%
The Dow Jones Industrial Average declined by –2.65%
The tech-heavy Nasdaq declined by –3.73%
The 10-Year Treasury yield closed at 4.32%

Last week, several key economic indicators were released, providing valuable insights into the health of the economy. The ISM Manufacturing Purchasing Managers’ Index (PMI) and Services PMI offered a snapshot of business conditions in the manufacturing and services sectors, respectively. The Manufacturing PMI was higher than forecasted at 52.7, indicating potential expansion in the manufacturing sector. In contrast, the Services PMI was lower than the previous reading at 51, suggesting a contraction in the services sector. The ADP Nonfarm Employment Change report showed a significant decline, coming in at about 50% lower than the previous reading at 77,000, giving an early indication of weakening private-sector employment trends. The initial jobless claims report provided a weekly update on the number of individuals filing for unemployment benefits, showing fewer filings than anticipated. Furthermore, the Average Hourly Earnings report from the Bureau of Labor Statistics provided insights into labor market conditions and wage growth, which increased by 0.3%.

In the energy sector, the Baker Hughes Oil Rig Count was closely watched for insights into drilling activity and future production levels. Friday’s reading showed no change from the previous reading. These indicators, along with the analysis of credit spreads, currency trends, and yield curve positioning, helped investors and policymakers assess the overall economic landscape and make informed decisions.

Spotlight

Small-cap Stocks – Premiums, Global Opportunities, and Recent U.S. Underperformance

Small-cap stocks have been key to investment portfolios, offering growth and diversification. Historically, they have outperformed larger stocks, a fact often referred to as the size premium. However, they vary across sectors and regions, each with unique risk-reward profiles. This article explores small-cap investing, highlighting global opportunities and recent U.S. underperformance. Understanding these dynamics helps investors make informed decisions and strategically allocate assets for maximum returns.

The size premium is the higher expected returns associated with smaller companies compared to larger firms over extended periods. This phenomenon is supported by historical data dating back to at least 1998, demonstrating that smaller companies have yielded higher returns in both U.S. and non-U.S. markets. The persistence of the size premium remains even after accounting for invest-ability constraints, indicating that the premium is not merely a result of illiquidity or limited investment capacity. Additionally, academic research identifies a “sweet spot” within the mid-cap and low-size factors, which can be leveraged to construct more efficient portfolios. The robustness of the size premium across different regions and economic regimes, coupled with its validation through academic studies, underscores its significance as a critical factor in investment strategies.

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Consequently, when looking to allocate towards small-cap stocks, it’s important to recognize that they are not a homogeneous group, as these stocks span various sectors and geographies, each with unique risk-reward profiles. Global small caps, in particular, present compelling risk-reward tradeoffs compared to large caps and emerging markets. Historically, global small caps have delivered higher returns than global large caps, averaging 8.5% versus 5.5% for 10-year periods. Additionally, they have exhibited lower volatility than emerging markets, making them an attractive option for investors seeking growth with manageable risk. Diversification across different countries helps mitigate some of the inherent volatility associated with small caps. Furthermore, international small caps have lower correlations with U.S. large caps, enhancing portfolio diversification and providing a buffer against domestic market fluctuations. However, global small caps are not free of risk, investors must often contend with deeper drawdowns in comparison to large caps. The graph below illustrates recent instances of significant drawdowns observed during periods of economic decline.

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Small-cap stocks are traditionally seen as procyclical, benefiting from economic upswings. However, their recent underperformance has defied this expectation. Despite periods of significant economic growth, such as in 2021 and the third quarter of 2023, where gross domestic product (GDP) growth was close to 5%, small caps have struggled. This is a stark contrast to their performance during the recovery from the Great Financial Crisis in 2009 and 2010. Over the past decade, the broad U.S. small-cap index has averaged a 6.5% annual return, significantly lower than the 11% return of the broad U.S. equity market. This underperformance, particularly in old economy sectors like financials and industrials, challenges the conventional wisdom that small caps always thrive in growth periods. Investors must now question these traditional rules and pay closer attention to the underlying fundamentals of small-cap stocks.

The recent underperformance of small-cap stocks presents a conundrum for investors. While historical performance suggests a disciplined approach to small-cap allocations, the ever-changing economic landscape reminds us that past trends cannot predict future outcomes. Investors must carefully consider how they allocate to small-cap stocks, as these decisions could significantly influence future returns. By staying adaptable and informed, investors can navigate the complexities of small-cap investing and position themselves for long-term success.

Works Referenced:

Arnott, Amy C. “How to Use Small-Cap Stocks in Your Portfolio.” Morningstar, Inc., June 18, 2024.
https://www.morningstar.com/portfolios/how-use-small-cap-stocks-your-portfolio.

Lefkovitz, Dan. “Are Small-Cap Stocks Worth Investing In?” Morningstar, Inc., November 27, 2023.
https://www.morningstar.com/stocks/are-small-cap-stocks-worth-investing-2.

Oberoi, Raina, Anil Rao, Lokesh Mrig, Raman Aylur Subramanian, and MSCI Inc. “ONE SIZE DOES NOT FIT ALL.” MSCI.COM, 2016.

Royce Research Financial Professionals. “Global Small-Caps: A World of Overlooked Opportunities.” Royce Investment Partners, n.d.

Week Ahead…

The week starts slow with no new economic data on Monday, though it picks up quickly on Tuesday with the Job Openings and Labor Turnover Survey (JOLTS) report, which will provide an early glimpse into the labor market’s strength and demand for workers. However, the week’s main event is undoubtedly Wednesday’s release of the latest Consumer Price Index (CPI) data. Investors and economists will be dissecting the numbers for any signs of changing inflationary trends, as these figures could significantly influence the Federal Reserve’s upcoming policy decisions. It’s important to note that any effects from recent tariff implementations are unlikely to be reflected in this particular CPI release.

Thursday brings the usual release of initial jobless claims and the Producer Price Index (PPI). The jobless claims data will be particularly interesting to monitor, especially after the surprising spike observed in the previous week. The PPI will offer additional insights into inflationary pressures building within the wholesale sector, complementing the CPI data and providing a more comprehensive view of the overall inflation landscape.

This content was developed by Cambridge from sources believed to be reliable. This content is provided for informational purposes only and should not be construed or acted upon as individualized investment advice. It should not be considered a recommendation or solicitation. Information is subject to change. Any forward-looking statements are based on assumptions, may not materialize, and are subject to revision without notice. The information in this material is not intended as tax or legal advice.

Investing involves risk. Depending on the different types of investments there may be varying degrees of risk. Socially responsible investing does not guarantee any amount of success. Clients and prospective clients should be prepared to bear investment loss including loss of original principal. Indices mentioned are unmanaged and cannot be invested into directly. Past performance is not a guarantee of future results.

The Dow Jones Industrial Average (DJIA) is a price-weighted index composed of 30 widely traded blue-chip U.S. common stocks. The S&P 500 is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy. The NASDAQ Composite Index is a market-value weighted index of all common stocks listed on the NASDAQ stock exchange.

Market Commentary | March 3rd, 2025

by lportee53 | Mar 3, 2025 | Market Commentary

Week in Review…

Most market indices closed the week lower as new U.S. data sparked concern among investors over a slowing economy and sticky inflation, leading them in search of safer assets.

The S&P 500 declined by -0.98%
The Dow Jones Industrial Average increased by 0.95%
The tech-heavy Nasdaq declined by -3.47%
The 10-Year Treasury yield closed at 4.25%

Last week, a slew of housing reports provided the market with a clearer understanding of the sector, but the data did not inspire much confidence.

On Wednesday, January New Home Sales data came in weaker than expected at 657,000 units, compared to the estimated 679,000 units. This was a significant drop from last month’s figure of 734,000 units, representing a decline of 10.5%. Building permits, a key indicator for future housing starts, were revised lower. Although the data came in higher than initially projected, this revision diminishes the previous week’s outperformance and may prompt markets to re-evaluate future projections.

Additionally, January Pending Home Sales month-over-month numbers declined by 4.6%, exceeding expectations of a 0.9% decline. This marked the second consecutive month of declining volume, with both January and December experiencing declines greater than 4%. In the background of this housing data was the sharp rise in 30-year mortgage rates, which bottomed in mid-December at 6.60% and peaked in mid-January at 7.04%, before ending the month at 6.95%. February has seen a steady decline in rates, and markets will closely monitor future reports to gauge how much demand lower rates might release.

Speaking of interest rates, markets observed movements in yields in the middle of the curve this week as 2-, 5-, and 7-year notes were auctioned off. Across the board, yields fell compared to last month. This decline in yields could be attributed to various factors, including sluggish housing data, weakening consumer confidence, and modest Q4 GDP data.

Perhaps the best news for markets last week came on Friday, as the Core Personal Consumption Expenditure (PCE) Price Index was in line with analyst expectations. January’s year-over-year numbers came in at 2.6%, significantly lower than December’s reading of 2.9%. This benign reading may help alleviate some of the inflation and stagflation fears that had been brewing since the hotter-than-expected Consumer Price Index (CPI) reading earlier this month.

The fall in yields and middling inflation numbers can be interpreted in various ways. Some might attribute it to the recent housing data, consumer confidence figures from Tuesday, and the modest Q4 GDP data influenced by personal spending. However, one week of data does not establish a trend, and markets will continue to look for emerging patterns.

Spotlight

The Evolution and Implication of the Commercial Real Estate Maturity Wall

Rising interest rates by the Federal Reserve, coupled with shifts in the post-pandemic landscape, continue to place significant strain on commercial real estate (CRE) mortgages, which are grappling with refinancing difficulties. The concept of the “maturity wall” within the CRE mortgage sector has been a topic of concern since the early stages of this cycle. The primary worry is that upcoming loan maturities could hinder borrowers’ efforts to refinance or alter their loans in a capital market that is increasingly costly and restrictive. Following up on this theme that was discussed in summer of 2023, in this spotlight, we will delve into how this narrative has developed over time and provide investors with a clearer understanding of the implications of the “maturity wall.”

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It is important for investors to understand the size and different players of the CRE debt market:

As of Q3 of 2024, according to the Mortgage Bankers Association (MBA), the CRE mortgage market for income-producing properties is approximately $4.75 trillion
A variety of lender types contribute capital to the sector, with the largest sources being depositors (banks and thrifts) and government-sponsored enterprises (GSE), which together account for over half of the commercial real estate (CRE) market. Following them are life insurance companies, commercial mortgage-backed securities (CMBS), collateralized debt obligations (CDOs), asset-backed securities (ABS), and other credit firms.
In addition, investors should be aware that CRE mortgages have a weighted average maturity of seven years, which means about 14% of the entire mortgage universe is expected to mature every year for any year. Given the $4.75 trillion market size of CRE mortgages, that translates to roughly $650 billion of CRE mortgages will mature on average annually, and $1.95 trillion to mature over the next three years.

With this context in mind, the maturity of $958 billion over the next year and $2.1 trillion over the next three years is not far off from what we may typically expect to see each year.

When examining the maturity wall by property type, we still see areas of distress that are likely to emerge as these loans come due. The office sector raises particular concerns, continuing to struggle with the impact of post-Covid work-from-home and hybrid work policies. Notably, 24% of all office loans are set to mature in 2025, unless they are extended. Other sectors will also encounter their own distinct challenges, influenced both by capital market conditions and fundamental factors.

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Considering where we are in the current economic cycle, the delinquency rate in the CRE market may worsen before it improves, especially as more loans approach their maturity dates. However, the level of distress may not be as severe as the market has anticipated. This is largely due to stronger underwriting standards established since the GFC, as well as loan modifications and extensions, and solid property fundamentals. The most significant distress is expected to manifest in loans secured by office properties, floating-rate loans, and short-term loans which originated during the peak pricing of 2022.

The CRE maturity wall situation presents a mixed outlook, with some experts such as PIMCO noting positive signs in certain sectors while cautioning against expectations of a rapid recovery. Regulatory changes may be implemented to manage banks’ CRE exposure, and Federal Reserve actions could provide some relief to borrowers, though pre-pandemic interest rates are unlikely to return soon. The implications for investors vary, with REITs potentially facing challenges due to declining property values, especially in the office sector, while private equity firms might find opportunities in distressed assets. In general, individual investors may exercise caution in these uncertain markets, where risks and opportunities coexist depending on specific property types and locations.

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Week Ahead…

Next week, several key economic indicators will be released, providing valuable insights into the health of the economy.

The ISM Manufacturing Purchasing Managers’ Index (PMI) and Services PMI will offer a snapshot of business conditions in the manufacturing and services sectors, respectively. The Manufacturing PMI is forecasted to be higher than the previous reading at 51.6, indicating potential expansion in the manufacturing sector. In contrast, the Services PMI is forecasted to be lower than the previous reading at 49.7, suggesting a contraction in the services sector. The ADP Nonfarm Employment Change report will give an early indication of private-sector employment trends, while the Initial Jobless Claims report will provide a weekly update on the number of individuals filing for unemployment benefits. Furthermore, the Average Hourly Earnings report from the Bureau of Labor Statistics will provide insights into labor market conditions and wage growth, which is anticipated to increase by 0.3%.

In the energy sector, the Baker Hughes Oil Rig Count will be closely watched for insights into drilling activity and future production levels. These indicators, along with the analysis of credit spreads, currency trends, and yield curve positioning, will help investors and policymakers assess the overall economic landscape and make informed decisions.

Securities offered through Cambridge Investment Research, Inc., a broker-dealer, member FINRA/SIPC, and investment advisory services offered through Cambridge Investment Research Advisors, Inc., a Registered Investment Adviser. Both are wholly-owned subsidiaries of Cambridge Investment Group, Inc. V.CIR.0325-0813

Market Commentary | February 24th, 2025

by lportee53 | Feb 24, 2025 | Market Commentary

Week in Review…

Major market indices closed the week lower as new U.S. data sparked concern among investors over a slowing economy and sticky inflation, leading them in search of safer assets.

The S&P 500 declined by –1.66%
The Dow Jones Industrial Average declined by –2.51%
The tech-heavy Nasdaq declined by –2.26%
The 10-Year Treasury yield closed at 4.43%

Last week was shorter for the U.S. market due to Presidents Day on Monday, but it was still packed with key economic data releases.

On Wednesday, the Fed Minutes showed that officials are generally at ease with their decision to keep interest rates unchanged from their recent meeting. They didn’t indicate any immediate shifts in their cautious approach to rate cuts. Following January’s meeting, Fed Chair Jerome Powell mentioned that the central bank would require “real progress on inflation” or an unexpected downturn in the labor market before considering further rate reductions.

In terms of the housing market, U.S. existing-home sales dropped by 4.9% in January compared to the previous month, landing at a seasonally adjusted annual rate of 4.08 million, as reported by the National Association of Realtors on Friday. Elevated home prices and mortgage rates continued to weigh on sales throughout January, discouraging many potential buyers. Some first-time homebuyers have found themselves priced out, while existing homeowners are opting to stay in their current homes rather than give up low mortgage rates.

Additionally, we saw the consumer sentiment index from The University of Michigan fall sharply to 64.7 at the end of February, down from January’s reading of 71.7. The survey highlighted particular concerns regarding buying conditions for durable goods, products designed to last at least five years, largely driven by fears of imminent tariff-related price increases.

Finally, the services and manufacturing purchasing managers’ index (PMI) indices were released. The services sector experienced expansion for the seventh month in a row in January, marking the 53rd month of growth since the economy began recovering from the pandemic-induced recession in June 2020. Meanwhile, the manufacturing sector showed signs of growth in January, ending a 26-month stretch of contraction.

Spotlight

Social Media’s Financial Gurus:

Are They Leading You to Fortune or Folly?

Financial influencers (finfluencers) have gained significant popularity in recent years, leveraging social media platforms to share investment advice and insights. According to Wesleyan’s The Next Step, finfluencers have taken social media by storm, particularly on platforms like TikTok with trends such as “FinTok”. While finfluencers make complex financial concepts more relatable and accessible, they often lack formal financial education or certifications. This lack of credentials and regulation can lead to the spread of misinformation, as social media platforms are vast and fast-moving, making it difficult to police content effectively.

MSN highlights that a significant portion of Gen Z looks to TikTok finfluencers for financial advice. While these influencers can make financial advice more accessible, there is a risk that young adults may not be saving as much as they could if they relied on more traditional financial advice. The article also emphasizes the importance of teaching young people to critically evaluate the financial advice they encounter on social media. A study from the Financial Industry Regulatory Authority (FINRA) found that 60% of younger investors use social media as a source of investment information, compared to 35% of those between 35 to 54 and only 8% of those 55 and older.

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Source: CFA Institute, The Finfluencer Appeal: Investing in the Age of Social Media

While many of these influencers provide valuable information, there is a growing concern about the potential for misleading investors. One way financial influencers can mislead investors is through the promotion of specific stocks or financial products without disclosing their own financial interests. For example, an influencer might recommend a particular stock because they hold a significant position in it and stand to benefit from a price increase. This lack of transparency can lead investors to make decisions based on biased information, ultimately resulting in financial losses.

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Another way finfluencers can mislead investors is by oversimplifying complex financial concepts. Investing is inherently risky and requires a thorough understanding of market dynamics, financial instruments, and risk management strategies. However, some influencers may present investment opportunities as “sure bets” or “guaranteed returns,” downplaying the associated risks. This can create unrealistic expectations among investors, who may then make poorly informed decisions. Additionally, the use of sensationalist language and hype can drive irrational behavior, such as panic buying or selling, which can further exacerbate market volatility.

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Furthermore, there are regulatory challenges related to the location of finfluencers and their audience. The Securities and Exchange Commission (SEC) has jurisdiction over investment advice provided to U.S. investors. However, if an influencer is based in a different country, the SEC’s ability to enforce regulations becomes complicated. Similarly, investors acting on advice from influencers located outside their own country may face difficulties in seeking recourse if the advice leads to financial losses. This jurisdictional issue can create a regulatory gap, leaving investors vulnerable to misleading information without adequate protection.

Moreover, financial influencers can mislead investors by providing advice that is not tailored to individual circumstances. Every investor has unique financial goals, risk tolerance, and investment horizon. Generic advice that does not take these factors into account can be detrimental. For instance, an influencer might advocate for aggressive investment strategies that are unsuitable for risk-averse individuals or those nearing retirement. This one-size-fits-all approach can lead to inappropriate investment choices and potential financial hardship.

While financial influencers can offer valuable insights, it is crucial for investors to approach their advice with caution. Conducting independent research, seeking advice from licensed financial professionals, and considering one’s own financial situation are essential steps to making informed investment decisions. Additionally, being aware of the regulatory challenges related to the location of influencers and investors can help mitigate potential risks.

Week Ahead…

As we look ahead to the coming week, the Conference Board will release the consumer confidence index on Monday. Following the sharp downturn in consumer sentiment last week, economists are intrigued to see whether the confidence index mirrors this trend.

On Wednesday, we can expect the data for new home sales. After a surprisingly strong showing earlier in the year, economists will be watching to see if the upward momentum continues, especially considering the decline in existing home sales this month.

Thursday brings the preliminary estimate of gross domestic product (GDP), which the market will focus on sharply, particularly if there are any significant revisions from last month’s advanced estimates.

Finally, we will wrap up the week with the Personal Consumption Expenditure (PCE) data on Friday. This report is the Federal Reserve’s preferred gauge of inflation, and it will be closely watched by economists and investors alike.

Market Commentary February 17th, 2025

by lportee53 | Feb 17, 2025 | Market Commentary

Week in Review…

Major market indices closed the week on a positive note, driven by robust data on the economic front, as the economy remains resilient despite trade and policy uncertainty.

The S&P 500 rose +1.47%.
The Dow Jones Industrial Average inched higher by +0.55%.
The tech-heavy Nasdaq rose +2.90%.
The 10-Year Treasury yield closed at 4.48%.

Last week’s economic reports painted a concerning picture of sticky inflation and weakening demand, though the labor market remained a point of strength.

Inflation worries intensified following Wednesday’s Consumer Price Index (CPI) release, where both headline and core figures exceeded expectations. Core CPI’s 0.4% month-over-month increase was the highest since April 2023, while headline CPI rose 0.5%, the largest jump since October 2023. Thursday’s Producer Price Index (PPI) report offered little relief, with core PPI meeting expectations at 0.3% and headline PPI slightly exceeding them at 0.4%. These data points suggest that taming inflation to the Fed’s 2% target may be a longer and more arduous journey than previously anticipated. Consequently, the market has nearly eliminated the possibility of a March 2025 rate cut, with the probability of a 25 bps reduction falling to a mere 2.5% as of Friday.

Demand-side concerns arose with Friday’s disappointing retail sales data. Core retail sales contracted by 0.4% month-over-month, significantly missing the expected 0.3% increase. This decline has raised concerns about Q1 gross domestic product (GDP) growth, with some analysts suggesting it could fall short of 2%, while some attribute the weak numbers to the post-holiday season and winter weather. Either way, the market will be closely watching future retail sales data for further signs of weakening consumer spending. Adding to demand concerns, crude oil inventories underperformed for the seventh consecutive week. While high spot oil prices may be masking the underlying weakness in demand for now, lower prices will likely force a reassessment of this trend.

Despite these concerns, the labor market continues to show resilience. Both continuing and initial jobless claims were lower than expected, with continuing claims beating estimates in five of the last seven weeks and initial claims in four of the last seven. Additionally, January’s industrial production in the manufacturing sector outperformed expectations, providing a bright spot. Finally, business and retail (ex-auto) inventories shrank more than anticipated, further confirming the strength seen in December’s data.

Spotlight

Pennies Out, Prices Up:

The Market Ripple Effect

It’s evident that pennies cost more to produce than their actual value. In 2024, the U.S. Mint spent approximately 3.69 cents to manufacture each penny, resulting in costs exceeding their face value for the 19th consecutive fiscal year. Furthermore, the latest U.S. Mint report indicates that nickels might also be at risk, as each 5-cent piece costs around 13.78 cents to make. However, halting the production of new pennies is anticipated to have significant implications for the stock market and the broader economy.

The outcome from the elimination of the penny will necessitate rounding prices to the nearest five cents for cash transactions. For example, a $6.99 item might be re-priced at $7.00. While this may seem minor, the cumulative effect of such rounding could lead to an overall increase in the cost of goods, thus leading to a slight inflationary effect. However, digital bills and credit card transactions will be charged as normal, without any rounding adjustments.

Unit Cost of Producing and Distributing Coins

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This inflationary pressure can impact consumer spending habits. As prices rise, consumers may become more cautious with their spending, particularly on small, everyday purchases. This shift in consumer behavior can affect the revenue of businesses that rely heavily on high volumes of small transactions, such as fast food chains and convenience stores. A decrease in consumer spending can lead to lower sales and, consequently, impact the stock prices of these companies.

Moreover, the broader market could experience indirect effects from this change. Investors may overreact or underreact to the anticipated changes in consumer behavior and business revenue projections, leading them to exit or enter positions that may fall outside of their typical investment style. Companies expected to be negatively impacted by the rounding up of prices may see a decline in their stock prices as investors adjust their expectations. Conversely, businesses that can adapt quickly and efficiently to the new pricing structure may gain investor confidence, potentially leading to an increase in their stock prices.

Additionally, this move is expected to support the shift towards electronic payments, benefiting large conglomerates such as Visa, Mastercard, and other real-time payment networks. As consumers and businesses transition to electronic transactions, these companies could see increased usage and revenue. According to the Federal Reserve, since the pandemic, consumers have shifted towards greater card usage, with predictions for this trend to continue increasing in the future.

Type of Payment Instrument Used Throughout the Years

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Overall, the end of the penny is more than just a minor adjustment; it has significant implications for the stock market. The slight inflationary effect from rounding prices can influence consumer spending, affect business revenues, and ultimately impact market dynamics. Investors will need to closely monitor these changes and adjust their strategies accordingly to navigate the evolving economic landscape.

Week Ahead…

Next week brings a flurry of economic data releases, offering crucial insights into the health of the housing market, the Federal Reserve’s thinking, and overall economic activity. From key housing reports to Fed speeches and sentiment surveys, economists will be watching closely for clues about future economic direction.

Next week offers key insights into the housing market, with January Building Permits and Housing Starts data released Wednesday, and Existing Home Sales on Friday. While the former predicts future housing activity, the latter signals current market strength and consumer health, crucial for economic growth.

The Fed will also be in focus. Three Federal Open Market Committee (FOMC) members will speak throughout the week, potentially hinting at future policy. With a March rate hold widely expected, attention will likely center on potential Q2 or Q3 rate cuts. Markets will analyze these appearances, along with Thursday’s FOMC meeting minutes, to glean insights into the Fed’s thinking and anticipate future moves.

Beyond housing and the Fed, Manufacturing and Services Purchasing Managers’ Index (PMI) data will offer a snapshot of sector health, with the Services PMI particularly important given its influence on GDP. Finally, Friday’s University of Michigan reports on inflation expectations, consumer expectations, and consumer sentiment will provide valuable data on consumer behavior and potential economic trends.

Market Commentary | February 10th, 2025

by lportee53 | Feb 10, 2025 | Market Commentary

Market Commentary | February 10th, 2025

Week in Review…

Major market indices ended the week lower due to mixed economic data. For the week ending February 7, 2025:

The S&P 500 closed down -0.24%.
The Dow Jones Industrial Average was lower, down -0.54%
The tech-heavy Nasdaq fell to -0.53%
The 10-Year Treasury yield closed at 4.49%.

Major market indices concluded the week on a lower note amidst concerns over rising inflation. The S&P 500 ended with a decline of 0.24%, while the Dow Jones Industrial Average saw a decrease of 0.54%. The Nasdaq, known for its tech stocks, fell by 0.53%. Meanwhile, the 10-Year Treasury yield settled at 4.49%.

Last week offered a mixed bag of signals for market watchers, particularly regarding the health of the labor market. Conflicting data points left investors parsing through a complex landscape of potential strengths and weaknesses.

The labor market data painted an unclear picture this week. The December Job Openings and Labor Turnover Survey (JOLTS) showed a decrease in job openings to 7.6 million, a drop of 556,000 from the previous month. Initial and continuing jobless claims, along with Nonfarm Productivity, all fell short of expectations, with initial claims being higher than expected for three out of the last four weeks. The January Nonfarm Payroll report indicated moderate growth with 143,000 jobs added, which was below the forecast of 170,000 but in line with the average monthly gain of 166,000 in 2024. This suggests a resilient labor market despite a slight slowdown from December’s impressive figures.

In January, the unemployment rate dipped to 4.0%, highlighting the ongoing strength of employment conditions. This unexpected decrease from December’s 4.1% further underscores the labor market’s resilience. Although the rise in wages could raise inflation concerns, the lower-than-expected Unit Labor Cost reading provided comfort. Notably, significant revisions to 2024 employment data revealed that 589,000 fewer jobs were added last year than initially reported. This adjustment offers a more accurate picture of recent labor market trends, indicating a more gradual growth pattern than previously anticipated.

Beyond labor, other key reports warrant attention. The ISM Manufacturing Prices report indicated higher input costs, potentially foreshadowing future inflation. The December trade deficit widened to $98.4 billion, a figure that will likely be scrutinized given the current focus on trade policy. Finally, crude oil inventories surged, continuing a six-week trend of weaker-than-expected oil demand. Overall, the week presented a wealth of often contradictory data, leaving markets with the challenging task of discerning the true underlying trends.

Spotlight

Tariffs in America: A Historical Perspective

Throughout American history, tariffs have been a controversial topic. From the nation’s early days, the struggle to find consensus on this issue set the stage for a long-standing debate in American trade policy. As one historian noted, “Except for slavery, tariffs became the most contentious federal policy issue of the 19th century and remained a source of continuous discord until the Great Depression.”

This enduring debate has shaped both domestic and international economic landscapes for over two centuries, reflecting broader tensions between protectionist and free trade ideologies, regional economic interests, and perspectives on national economic development. The ongoing nature of this debate underscores the complexity of balancing domestic industry protection with international trade benefits, highlighting how economic policies are intrinsically linked to political ideologies, regional interests, and changing global economic conditions.

Historical Background

Tariffs have been a contentious issue in American history since the nation’s inception. This became evident in 1789 when James Madison proposed tariffs and tonnage duties to fund the new government’s operations and debt payments. Sectional interests quickly emerged, with Northern manufacturers advocating for high protective tariffs and Southern planters favoring low tariffs. Despite reaching a compromise, tariffs remained controversial, plagued by conflicting regional interests.

Protectionism

Over time, protecting regional interests evolved into safeguarding American interests, leading to the rise of protectionism. Alexander Hamilton articulated the “infant industry” argument in his 1791 Report on Manufactures, suggesting that nascent American industries needed protection from foreign competition. His proposals for differentiated tariff rates laid the foundation for protectionist policies. Henry Clay further advanced these policies through his “American System,” which aimed to protect American industry, foster commerce with a national bank, and develop agricultural markets through federal subsidies. Clay’s protectionist stance met substantial opposition and led to decades of political crises.

Opposition to Protectionism

Opposition to protectionism in the 19th century was significant. Many believed high tariffs would harm consumers and foster corruption through rent-seeking behavior. This opposition was evident in events like the Nullification Crisis of 1832.

Free traders achieved notable victories, such as the Walker Tariff of 1846, which reduced rates and established standardized ad valorem rates. British imports tripled between 1846 and 1857, and tariff revenues increased significantly. The Underwood Tariff of 1913 further reduced tariff rates and introduced the federal income tax as an alternative revenue source.

Early 20th Century

Protectionists enjoyed success with the Fordney-McCumber Tariff of 1922, which restored rates to pre-Underwood levels. This period of high tariff protectionism saw strong domestic economic performance.

However, the Smoot-Hawley Tariff Act of 1930, which raised average tariff rates to nearly 60 percent, proved disastrous. It precipitated a global trade war and exacerbated the Great Depression, leading to a significant decline in world trade and further economic downturn.

Today’s Realities

Tariffs remain a contentious issue, influencing domestic market prices and resource allocation. While history serves as a guide, the contemporary tariff debate has evolved to reflect new realities that have taken center stage. These include China’s economic dominance and trade practices, shifting power balances among major economies, the growing influence of emerging markets, developing nations’ roles in global trade, technological advancements impacting international commerce, environmental concerns, sustainable trade practices, and the complexities of global supply chains.

This ongoing debate highlights the intricate and lasting impact of tariff policies on both economic and political landscapes. Reflecting on the wisdom of the past, one historian observed that trade policy remains a hotly debated topic because, “dollars and jobs are at stake whenever import duties are adjusted.”

Week Ahead…

The economic spotlight will intensify mid-week, as a series of significant reports provide a snapshot of the current economic landscape. These reports, covering inflation, the labor market, consumer spending, and industrial production, will offer a comprehensive view of the economy and influence future policy decisions.

On Wednesday, February 12, the Bureau of Labor Statistics will release the Consumer Price Index (CPI) for January 2025. The previous CPI reading for December 2024 showed a 0.4% increase month-over-month and a 2.9% increase year-over-year. This report is crucial for assessing inflationary pressures on consumers, as it measures changes in the prices they pay for goods and services. The following day, Thursday, February 13, the Producer Price Index (PPI) for January 2025 will be published. The previous PPI reading for December 2024 showed a 0.2% increase month-over-month, below the expected 0.4%. The PPI tracks changes in selling prices received by domestic producers, offering early insights into wholesale inflation trends that may eventually impact consumer prices.

Next week, the Department of Labor will release the weekly initial and continuing jobless claims. The most recent data showed 219,000 initial claims for the week ending February 1, and 1,858,000 continuing claims for the week ending January 18. Economists will be monitoring these figures to see if the trends continue, as low jobless claims may signal a resilient labor market.

Closing out the week on Friday, the retail sales report will be released, measuring total receipts of retail stores, indicating consumer spending levels. Retail sales are a key indicator of consumer spending, which drives a significant portion of economic activity. Strong retail sales suggest robust consumer demand which can support economic growth. Concurrently, the U.S. Baker Hughes Oil Rig Count, a leading indicator of oil production activity, will be released, signaling future oil production levels.

Market Commentary | February 3rd, 2025

by lportee53 | Feb 3, 2025 | Market Commentary

Market Commentary | February 3rd, 2025

Week in Review…

Major market indices experienced a volatile week driven by a combination of earnings releases, new entrants into the artificial intelligence sector, and the Federal Reserve’s rate decision. For the week ending January 31, 2025:

The S&P 500 ended down 0.99%
The Dow Jones Industrial Average led major indices up 0.27%
The tech-heavy Nasdaq finished down 1.64%
The 10-Year Treasury yield concluded at 4.541%

The Federal Reserve held its first Federal Open Market Committee (FOMC) meeting of the year and decided to keep the federal funds rate steady at a target range of 4.25% to 4.50%. Chairman Powell emphasized that the Fed would need to see “real progress on inflation” or unexpected weakness in the labor market before considering further rate cuts. This tempered expectations for rate reductions later in the year, as the Fed remains committed to controlling inflation before making policy adjustments.

The Bureau of Economic Analysis reported that the fourth-quarter real GDP grew at an annualized rate of 2.3%. Although this indicates ongoing economic resilience, it fell slightly short of forecasts, suggesting a cooling in consumer and business activity. Additionally, the Personal Consumption Expenditures (PCE) price index, the Fed’s preferred measure of inflation, increased by 0.3% in December, bringing the annual rate to 2.6%. This reinforced the Fed’s cautious approach, as inflation remains above the 2% target despite steady declines over the past year.

Financial markets saw notable volatility, particularly in sectors tied to Artificial Intelligence. Concerns over competition in the global market led to significant declines in equity prices, reflecting investor uncertainty about future growth prospects.

Trade policy also influenced market sentiment. Reports indicated that the administration is considering tariff adjustments on imports from key trading partners, sparking discussions about potential impacts on supply chains and inflation. While the overall economic outlook remains stable, uncertainty surrounding trade relations and monetary policy contributed to cautious investor sentiment.

These developments underscore the ongoing balancing act between controlling inflation, sustaining economic growth, and maintaining market stability. As the year progresses, the interplay between monetary policy decisions, economic indicators, and global trade policies will continue to shape the trajectory of the U.S. economy.

Spotlight

Stargate – America’s Bold AI Initiative

The Stargate initiative, unveiled by President Donald Trump on January 21, is a $500 billion joint venture aimed at bolstering the United States’ artificial intelligence (AI) infrastructure. This ambitious project brings together leading tech giants¹, with the goal of positioning the U.S. as a global leader in AI technology while driving significant economic and technological progress.

Strategic Importance

Many prominent market analysts suggest Stargate may represent a pivotal shift in the approach to AI development and infrastructure. By creating a coalition model where competitors collaborate on shared infrastructure, the initiative addresses the growing need for advanced AI capabilities that exceed the capacity of individual data centers. This collaborative approach is suggested to be crucial for maintaining the U.S.’s competitive edge in the global AI race, particularly against China. The project’s strategic importance is further underscored by its scale and scope. With plans to construct 10 data centers initially, expanding to 20 locations of about half a million square feet each, Stargate aims to create a robust network of AI-powered infrastructure across the nation. The first data center is already under construction in Abilene, Texas, with potential sites being evaluated across the country.

Technological Collaboration

Interdisciplinary Research: The Stargate initiative encourages interdisciplinary research, bringing together experts from AI, data science, cybersecurity, and other fields to foster innovation and address complex challenges.
Open Innovation Platforms: By establishing open innovation platforms, Stargate aims to facilitate collaboration between academia, industry, and government, accelerating the development and deployment of cutting-edge AI technologies.

Economic Implications

The economic impact of Stargate is expected to be substantial, both in the short and long term:

Job Creation: The initiative is projected to create over 100,000 new jobs, providing an immediate boost to employment and consumer spending.
Infrastructure Investment: The massive $500 billion investment over four years will stimulate economic activity in construction, supply chain, and supporting industries.
Technological Advancement: By enhancing AI capabilities, Stargate is suggested to drive innovation across various sectors, potentially leading to breakthroughs in fields such as healthcare. For instance, Oracle’s CEO highlighted AI’s potential in developing cancer vaccines.
Global Competitiveness: The project aims to enhance U.S. dominance in AI technologies, attracting global investment and talent.
Long-term Growth: The development of AI infrastructure is expected to create new economic opportunities and drive long-term growth in the tech sector and beyond.
Environmental Stewardship: The initiative emphasizes eco-friendly practices in data center construction and operation, utilizing renewable energy and efficient technologies to reduce carbon emissions and support sustainability goals.
Educational Initiatives: Stargate includes programs to enhance AI education and workforce training, preparing for an AI-driven economy. It also plans public awareness campaigns on AI benefits and ethics.

Investor Implications

The project has generated significant investor interest by:

Boosting stock performance of involved companies
Creating new investment opportunities in AI infrastructure
Improving market sentiment toward AI technologies
Highlighting potential in data centers and related tech sectors

Challenges and Considerations

Despite its promising outlook, Stargate may have to address several challenges:

Funding Uncertainty: While the initial commitment is $100 billion, the source of the full $500 billion funding remains unclear.
Geopolitical Implications: The involvement of foreign investors could raise questions about national security and technology transfer.
Ethical Considerations: As AI capabilities expand, addressing ethical concerns and potential societal impacts will be crucial.

Following the recent advancements of the Deep Seek project, the Stargate initiative is said to stand out as a groundbreaking endeavor to transform the AI landscape in the United States. Its potential success could greatly enhance the U.S. economy, sustain technological leadership, and open numerous investment opportunities. However, achieving its full potential will require navigating the ambitious scale of the project and the intricate mix of technological, economic, and geopolitical challenges. This is particularly crucial as the U.S. faces increasing competition from China, which is also heavily investing in AI to secure its position as a global leader in technology.

Week Ahead…

The Federal Reserve’s decision to hold rates steady sets the stage for a crucial week of economic data, particularly concerning the labor market. BMO Capital Markets’ Michael Gregory highlighted that “the room to be concerned about stubborn inflation and thus more cautious about policy rate cuts is afforded by a sturdy labor market and the broader economy.” This coming week may either reinforce or challenge that assessment.

The labor market will be in focus, beginning with Tuesday’s Job Openings and Labor Turnover Survey (JOLTS) report, which provides insights into job openings and separations. Its importance is amplified by the 256,000 non-farm payroll jobs added during the covered period. Friday’s January non-farm payroll release will also be pivotal. Following December’s strong performance, another robust number would bolster the Fed’s confidence in its decision. However, the ongoing divergence between ADP and BLS payroll figures adds a layer of complexity. Friday also brings the unemployment rate, currently around 4.1%-4.2%; any significant shift could spark market volatility. Other key labor data includes jobless claims and average hourly earnings.

Beyond the labor market, a series of ISM reports will provide insights into the broader economy. Monday will feature the ISM Manufacturing report, followed by the ISM Services report on Wednesday. Investors will closely watch the Purchasing Managers’ Index (PMI) to gauge sector expansion or contraction, and the Prices Paid component for inflation signals. Thursday’s Nonfarm Productivity and Unit Labor Costs reports will offer additional clues about inflation. In general, productivity growth can enable wage increases without causing inflation, while unit labor costs are a leading indicator of consumer inflation.

¹https://apnews.com/article/trump-ai-openai-oracle-softbank-son-altman-ellison-be261f8a8ee07a0623d4170397348c41

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