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Market Brief: February 2025

February 4, 2025

The Markets (as of market close January 31, 2025)

Stocks posted strong gains in January after losing ground in December. The gains likely reflected investor optimism that a second Trump administration will favor businesses, with the hope that the president-elect will take a more moderate stance on trade tariffs, although the White House announced in early February that tariffs would soon go into effect for China, Canada, and Mexico. Ten of the 11 market sectors ended January higher, except information technology. Communication services, financials, and health care outperformed. Over the last 12 months, each of the market sectors showed positive results, led by communication services, financials, and consumer discretionary.

The latest data showed inflation has stubbornly resisted falling lower. The personal consumption expenditures (PCE) price index rose from a low of 2.1% for the 12 months ended in September to 2.6% for the same period ended in December, which supports the Federal Open Market Committee's assessment that inflation "remains somewhat elevated." Another potential inflationary risk is the impact of tariffs, which gives the Fed ample justification to hold interest rates steady over the next few months.

Growth of the U.S. economy continued at a modest pace. The gross domestic product (GDP) fell marginally short of expectations after increasing 2.3% in the fourth quarter following a 3.1% increase in the third quarter. For 2024, GDP rose 2.8%, 0.1 percentage point less than the 2023 rate. Personal consumption expenditures, the largest contributor to the calculation of GDP, rose 4.2% in December, with spending rising on durable goods, nondurable goods, and services. For 2024, consumer spending rose 2.8%. Despite falling 5.6% in December, gross private domestic investment (including nonresidential and residential investment) climbed 4% in 2024.

Job growth rose by 2.2 million in 2024, averaging a monthly gain of 186,000. The unemployment rate remained steady at 4.1%. Wages rose 3.9% over the past 12 months. The number of job openings (8.1 million jobs in November--the latest data), hires (5.3 million), and separations (5.1 million) remained fairly consistent through 2024. The latest unemployment data showed total claims paid at the end of January were only slightly higher than the figure from January 2024.

The S&P reported better-than-expected fourth-quarter earnings growth early in the reporting season. According to FactSet, the net profit margin for the S&P 500 was 12.1% for the fourth quarter, which is below the previous quarter's net profit margin but above the net profit margin from a year ago.

The real estate sector reversed course in December. Sales of both new and existing homes increased last month. Mortgage rates have begun to trend marginally lower, which has impacted sales. According to Freddie Mac, the 30-year fixed-rate mortgage averaged 6.96% as of January 23. That's down from 7.04% one week ago but up from 6.69% one year ago.

Industrial production expanded for the second consecutive month in December. Manufacturing output, mining, and utilities increased for the month. Over the last 12 months, industrial production, mining, and utilities increased, while manufacturing output was unchanged. Purchasing managers reported manufacturing continued to slow in December as new orders decreased, while the rate of decline in production accelerated. On the other hand, the services sector grew higher in December, which saw a strengthening of business activity and new orders.
 
Ten-year Treasury yields closed the month falling to the lowest rate in six weeks as economic data in general, and inflation data in particular, point to status quo for the Fed's monetary policy. The two-year note closed December at 4.23%, down 3 basis points from a month earlier. The dollar index was essentially unchanged from a month earlier. Gold prices rose in December, reaching a new record high. Crude oil prices ticked up by about $2 per barrel by end of January as investors awaited further insights regarding President Trump’s tariffs. The retail price of regular gasoline was $3.103 per gallon on January 27, $0.097 above the price a month earlier and $0.008 higher than the price a year ago.
 

Chart reflects price changes, not total return. Because it does not include dividends or splits, it should not be used to benchmark the performance of specific investments.

Looking ahead

Entering February, much of the focus will be on the economy, inflation, and global unrest, particularly in the Middle East. Recent data has shown that inflationary pressures ticked higher at the end of 2024, prompting much debate as to whether, or when, the Federal Reserve, which does not meet again until March, will decrease interest rates. There will likely be more executive orders from President Trump for investors to consider.

Data sources: Economic: Based on data from U.S. Bureau of Labor Statistics (unemployment, inflation); U.S. Department of Commerce (GDP, corporate profits, retail sales, housing); S&P/Case-Shiller 20-City Composite Index (home prices); Institute for Supply Management (manufacturing/services). Performance: Based on data reported in WSJ Market Data Center (indexes); U.S. Treasury (Treasury yields); U.S. Energy Information Administration/Bloomberg.com Market Data (oil spot price, WTI, Cushing, OK); www.goldprice.org (spot gold/silver); Oanda/FX Street (currency exchange rates). News items are based on reports from multiple commonly available international news sources (i.e., wire services) and are independently verified when necessary with secondary sources such as government agencies, corporate press releases, or trade organizations. All information is based on sources deemed reliable, but no warranty or guarantee is made as to its accuracy or completeness. Neither the information nor any opinion expressed herein constitutes a solicitation for the purchase or sale of any securities, and should not be relied on as financial advice. Forecasts are based on current conditions, subject to change, and may not come to pass. U.S. Treasury securities are guaranteed by the federal government as to the timely payment of principal and interest. The principal value of Treasury securities and other bonds fluctuates with market conditions. Bonds are subject to inflation, interest-rate, and credit risks. As interest rates rise, bond prices typically fall. A bond sold or redeemed prior to maturity may be subject to loss. Past performance is no guarantee of future results. All investing involves risk, including the potential loss of principal, and there can be no guarantee that any investing strategy will be successful.

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