Market Commentary

For the week ending 1/10/2025

 

Inflation fears and “higher for longer” interest rates weighed on stocks and brought the indices down for the week, which was shortened due to Thursday’s market closure in honor of former U.S. President Jimmy Carter.  Small-cap stocks underperformed their large-cap peers for the fifth week in the past six, even as the NASDAQ fell 2.3%, its biggest weekly drop since mid-November.

In terms of economic data releases, the Institute for Supply Management (ISM) services sector index came in at 54.1 for the month of December, two percentage points higher than November’s reading, which is a good signal for economic growth.  But prices paid for materials and salaries increased by 6.2% to 64.4, stoking fears that progress on bringing down inflation has stalled.

Adding to these fears, Federal Reserve Governor Michelle Bowman noted in a speech on Thursday that inflation has held “uncomfortably above” the Fed’s 2% long-term target and that, while the Fed made significant progress in 2023, there are still upside risks to inflation. Minutes from the Fed’s December policy meeting indicated that most officials were comfortable holding rates steady at their upcoming meeting in January, as “almost all participants judged that upside risks to the inflation outlook had increased.”

The economic calendar wrapped up Friday morning with the Labor Department’s monthly nonfarm payrolls report for December. The report indicated that the U.S. economy added 256,000 jobs during the month, well ahead of consensus expectations for 155,000. The December data capped off a resilient year for U.S. labor markets despite facing several headwinds and provided Fed officials with another point in favor of moderating the pace of rate cuts. Stocks turned sharply lower on Friday following the data release, solidifying the major indexes’ losses for the week.

U.S. Treasury yields were higher heading into Friday and jumped following the blowout jobs  report, with the benchmark 10-year U.S. Treasury note yield touching its highest level since November 2023.

Interest rates represent the “cost of money.”  As money becomes more expensive, investors need a higher rate of return to make their investments worthwhile.  This puts a big onus on corporate earnings to keep pace.  Delta Airlines and Walgreens reported last week (both reports were pretty good) and the big banks are due to release their earnings this week, kicking off the Q4 2024 earnings season.  According to FactSet, earnings growth for the fourth quarter (compared to the fourth quarter of 2023) is estimated to come in at about 12%.  This is certainly a good number and would indicate solid growth.  The problem for investors is that Wall Street already has this kind of growth “priced in,” which means that if companies achieve their estimates they won’t get much of a lift.  However, companies that miss estimates, even by a little bit, could get punished, dragging the indexes down with them.

Having priced in current growth estimates, Wall Street will be particularly focused on what CEOs and CFOs have to say about their outlook for the next four quarters when they report.  Expect a lot of questions from analysts about tariffs and what the contingency plans are should they prove disruptive.

For the week, the Dow Jones fell 794 points to 41,938 (-1.9%), the NASDAQ was down 460 points to 19,162 (-2.3%), and the S&P 500 declined 115 points to 5,827 (-1.9%)

Oil rose $2.50 to $76.50/bbl.    Gold surged $60 to $2,715/oz.

And the yield on the 10 yr. Treasury jumped 0.2 to 4.8%.

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