Over the weekend, oil prices rallied to their highest levels in five months, as a fresh wave of US sanctions against Russia’s energy industry threatened to slash supplies from one of the world’s top producers and only added to what is a growing list of financial market worries.
Stock indexes came out of the gate on Monday morning by adding to the losses that have plagued investors so far in 2025, not helped by news of disappointing Apple iPhone sales, Moderna slashing revenue estimates and even Nvidia slipping into the red for the year after Biden’s move to expand AI chip export restrictions to more than 120 countries.
Interest rates began the day by resuming their upward trajectory ahead of upcoming inflation and retail sales data, with no initial sign of any reversal of recent advances. A valiant late day surge in the S&P 500 as interest rates stabilized a little pushed the index slightly into the green by the close but the NASDAQ still finished lower for the session.
The Producer Price Index (PPI) measure of wholesale inflation experienced by manufacturers was released pre-market on Tuesday and came in at a better-than-expected annualized rate of 3.3%, even more good news for the economy and even less reason for the Fed to consider cutting interest rates any further.
There was something of a surprising relief rally when the market opened, but the enthusiasm waned as the day wore on as jitters developed about what the CPI release may show and stock prices closed lightly lower.
It was super-busy before the market open on Wednesday morning. We learned as Q4 2024 earnings season got under way that profits at Goldman Sachs more than doubled while JPMorgan and Wells Fargo both posted hefty, forecast-beating increases in profits. For its part, Citibank swung back to profitability.
Traders then finally got to see the latest Consumer Price Index (CPI) measure of retail inflation and it was almost exactly what they had anticipated, with the annualized headline rate at +2.9% and the core rate (excluding food and energy) coming in slightly lower than expected. Under the hood, there were hopeful signs of more muted rises in the prices of shelter, air travel and even eggs.
The futures market-most favored expectation for the timing of the next Fed rate cut immediately pulled back from October to July, although no-one seriously believes that there’ll be any kind of cutting going on at the next Fed meeting at the end of this month.
Wall Street delivered a standing ovation to the inflation bullet-dodge. Interest rates crumbled and stocks blasted higher. There was more good news as word emerged of a possible Middle East ceasefire agreement. It was great day at the office for all the stock indexes which ended the session near their highs of the day.
The early trend of impressive earnings continued on Thursday with upbeat reports from Morgan Stanley, Bank of America and Taiwan Semiconductor. Retail Sales data showed a continued high level of spending by the American consumer. Stock prices calmed following the previous day’s rocket ride and basically flatlined, finishing slightly lower, with the NASDAQ sinking the furthest.
The upward momentum in stocks and slump in interest rates resumed on the final trading day of the Biden administration on Friday morning with the apparent corpse of multiple interest rate cut hopes in 2025 beginning to show flickering signs of life and the International Monetary Fund (IMF) raising its forecast for global economic growth, driven mostly by expansion in the United States. The indexes all finished nicely higher, led by the NASDAQ, to bring what ended up being a week of solid gains to a close.
At what feels like something of a crossroads for markets, I thought I’d look at the two extreme examples of what a dream scenario and a nightmare one for stocks would look like and what to keep an eye out for. As always, the truth will probably end up somewhere in between these extremes. But if it doesn’t this is what you can expect.
Dream scenario ..
The Fed clarifies that it has not paused rate cuts
Economic data moderates and returns to steady Goldilocks readings
The 10 year Treasury interest rate stabilizes in the mid-to-low 4% zone
Trump’s tariff threats prove to be more bluster than reality
This turn of events could legitimately send the S&P 500 bouncing back through 6000 and beyond as it reinforces the near-perfect market narrative of i) still-easing Fed with at least gradually declining interest rates, ii) solid economic growth (soft landing) and iii) a re-focus on the pro-growth benefits of a Trump administration rather than all the additional nonsense and distraction that come with it.
Nightmare scenario ..
The Fed confirms or conspicuously fails to deny a pause in rate cuts, ending the easing cycle
Economic growth strongly accelerates or suddenly reverses implying a growth scare
The 10-year Treasury interest rate surges back towards and breaks through 5%
Trump actually enacts sweeping and extensive tariffs that disrupt and damage global trade and the US economy and inevitably drive up inflation
Combined, this set of events would undermine or even destroy the positive narrative upon which the entire stock market rally of the last two years is based and a very sudden and very steep drop in stock prices should be expected.
OTHER NEWS ..
Americans Are Unhappy About Their Money .. A new joint poll from Yahoo Finance and Marist found that 78% of Americans are unsatisfied with how much money they've saved as higher costs have strained budgets, led to credit card debt and depleted excess savings they may have built up. The survey is a snapshot of banked American adults, providing an alternative data point to the official statistics that confirms today's troubling current lower savings rate, which run contrary to many of the other measures of Americans that point to a healthy consumer, but one who loves to spend rather than save as evidenced recently by Retail Sales numbers.
Cheat (allegedly!) .. Elon Musk cheated Twitter shareholders out of over $150 million by deliberately failing to disclose his growing stake in the platform as required by law ahead of a takeover in 2022, the Securities and Exchange Commission said in a lawsuit following a two year investigation. The complaint was disputed by Musk’s lawyers, but he’s also facing similar litigation from individuals and pension funds, seeking compensation for losses incurred by his illegal behavior.
ARTICLE OF THE WEEK ..
The bond market is taking center stage in financial markets and bossing the direction of stocks right now. Here’s what you need to know.
THIS WEEK’S UPCOMING CALENDAR ..
Stock and bond markets will be closed on Monday for Martin Luther King Day.
The pointless orgy of out-of-touch arrogance and self-love that is the nauseating World Economic Forum (WEF) at Davos, Switzerland somehow managed to schedule itself around the same time as the US Presidential inauguration, the date of which has been known since 1933. So much for the world’s supposed intelligentsia.
Back on planet earth, people with real jobs who actually do understand how global financial markets work have a busy week ahead of them.
They will need to navigate the possibility of a flurry of post-inauguration executive orders from Trump as well as an avalanche of Q4 2024 earnings reports, including from Netflix, American Express, Procter & Gamble, American Express, Verizon Communications, 3M, Charles Schwab, Johnson & Johnson, Texas Instruments, NextEra Energy, D.R. Horton and United Airlines.
The Bank of Japan will announce a highly anticipated interest rate decision on Friday and is expected to hike interest rates by a quarter of a point, to 0.50%.
LAST WEEK BY THE NUMBERS:
Last week’s market color courtesy of finviz.com
Last week’s best performing U.S. sector: Energy (two biggest holdings: Exxon-Mobil, Chevron) for the third week in a row ⬆︎ 6.3% for the week.
Last week’s worst performing U.S. sector: Healthcare (two biggest holdings: Eli Lily, UnitedHeath Group) ⬆︎ 0.4% for the week.
SPY, the S&P 500 Large Cap ETF, tracks the S&P 500 index, made up of 500 stocks from a universe of the largest U.S. companies. Its price rose 3.9% last week, is up 2.0% so far this year and ended the week 1.7% below its all-time record closing high (12/06/2024).
IWM, the Russell 2000 Small Cap ETF, tracks the Russell 2000 index, made up of the bottom two-thirds in terms of company size of a universe of 3,000 of the largest U.S. stocks. Its price rose 3.0% last week, is up 2.0% so far this year and ended the week 7.0% below its all-time record closing high (11/08/2021).
INTEREST RATES:
FED FUNDS * ⬌ 4.33% (unchanged)
PRIME RATE ** ⬌ 7.50% (unchanged)
3 MONTH TREASURY ⬇︎ 4.34% (4.36% a week ago)
2 YEAR TREASURY ⬇︎ 4.27% (4.40% a week ago)
10 YEAR TREASURY *** ⬇︎ 4.61% (4.77% a week ago)
20 YEAR TREASURY ⬇︎ 4.91% (5.04% a week ago)
30 YEAR TREASURY ⬇︎ 4.84% (4.96% a week ago)
Treasury data courtesy of ustreasuryyieldcurve.com as of the market close on Friday.
* Decided upon by the Federal Reserve. Used as a basis for determining high yield savings accounts rates.
** Used as a basis for determining many consumer loan rates such as personal, home equity and auto.
*** Used as a basis for determining mortgage rates.
AVERAGE 30-YEAR FIXED MORTGAGE RATE:
⬆︎ 7.04%
One week ago: 6.93%, one month ago: 6.72%, one year ago: 6.60%
Data courtesy of: FRED Economic Data, St. Louis Fed as of last Thursday.
FEDWATCH INTEREST RATE TOOL:
Where will the Fed Funds interest rate be after the next rate-setting meeting on January 29th?
Unchanged from now .. ⬆︎ 98% probability (97% a week ago)
0.25% lower than now .. ⬇︎ 2% probability (3% a week ago)
What is the most commonly expected number of 0.25% Fed interest rate cuts in 2025?
⬌ 1 (unchanged from a week ago)
All data based on the Fed Funds interest rate (currently 4.33%). Calculated from Federal Funds futures prices as of the market close on Friday. Data courtesy of CME FedWatch Tool.
FEAR & GREED INDEX:
“Be fearful when others are greedy and be greedy when others are fearful.” Warren Buffet.
The Fear & Greed Index from CNN Business can be used as an attempt to gauge whether or not stocks are fairly priced and to determine the mood of the market. It is a compilation of seven of the most important indicators that measure different aspects of stock market behavior. They are: market momentum, stock price strength, stock price breadth, put and call option ratio, junk bond demand, market volatility and safe haven demand.
Extreme Fear readings can lead to potential opportunities as investors may have driven prices “too low” from a possibly excessive risk-off negative sentiment.
Extreme Greed readings can be associated with possibly too-frothy prices and a sense of “FOMO” with investors chasing rallies in an excessively risk-on environment . This overcrowded positioning leaves the market potentially vulnerable to a sharp downward reversal at some point.
A “sweet spot” is considered to be in the lower-to-mid “Greed” zone.
Data courtesy of CNN Business as of Friday’s market close.
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