February Market Insights: A New Administration Gets Down to Business
January seemed to go on forever with the country facing extreme weather and devasting wildfires. The new administration got underway with a flurry of activity, particularly around tariffs, which had been a staple campaign promise (and market wild card). This temporarily caused some market turmoil, but a compromise in short order seemed to validate the market’s perception that this business-oriented administration may be looking more toward future negotiations and less toward long-term economic policy. “Yes, both” is likely the best answer to the tariff question going forward.
At its late January meeting, the Federal Reserve paused (as anticipated), and the accompanying statement was perceived as hawkish, leading to the belief that the status quo of higher-for-longer will likely remain in effect. The Fed reiterated its commitment to a data-dependent decision making process, trying to stay away from the politics of the moment.
Let's get into the data:
Inflation, as measured by CPI, bumped up slightly. CPI rose 2.9% for the 12 months ended in December. This was in line with Dow Jones economists’ forecasts.
Non-farm payrolls for January came in at 143,000. The U.S. Bureau of Labor Statistics reported fewer than the 170,000 jobs that were expected, but the unemployment rate fell to 4%
Consumer confidence declined. The Conference Board Consumer Confidence Index® declined by 5.4 points in January, following a decline in December.
The Fed held rates steady. The key short-term rate remained in a range between 4.25%-4.5%.
What Does the Data Add Up To?
The new administration is starting with a strong economy, if measured by data around GDP, labor markets and lower inflation. The Federal Reserve has room to assess future moves, even with a slightly weaker labor market reading in January.
Consumers, tired of the lingering effects of sky-high inflation that are continuing to be felt at the grocery store, and everywhere else, had a different read on the economy. This doesn’t appear to have lifted yet, as consumer confidence continues to decline. It’s important to note that The Conference Board reports that “Consumer confidence has been moving sideways in a relatively stable, narrow range since 2022.” January’s number was at the low end of that range, but it doesn’t mark a significant downward departure.
The first days of the new administration have been non-stop action. The Trump administration is taking a bold approach to policy and setting some big stakes in the ground. Tariff announcements on Mexico and Canada were met with cooperation in this round and are on hold for now. This is largely what the market expected. Even if some form of tariffs is eventually enacted, the threat of higher inflation and a cratering stock market has receded for now.
There was some good news in the CPI data, as shelter costs, which have been slow to come down and make up a big component of CPI, experienced the smallest one-year gain since January 2022.
The Fed was mostly concerned about inflation at the January meeting and removed the language that inflation “has made progress” toward 2% that was present in the December statement. Instead, labor market conditions were referred to as “solid,” while inflation is “somewhat elevated.” The non-farm payroll data, even with lower unemployment, doesn’t shake the solid foundation of labor where the economy is concerned. It may not be the “weakness in the labor market” that Powell referenced would be necessary before resuming rate cuts.
Chart of the Month: A January Slowdown, But A Strong Labor Market Overall
U.S. Non-Farm Payrolls
Source: U.S. Bureau of Labor Statistics, CNN
Equity Markets in January
The S&P 500 was up 2.70% for the month
The Dow Jones Industrial Average rose 4.70% ]
The S&P MidCap 400 increased 3.78% for the month
The S&P SmallCap 600 was gained 2.85%
Source: S&P Global. All performance as of January 31, 2025
It was a strong January for the equity markets, and for believers in market lore, that would indicate a strong year is ahead of us. The saying “as January goes, so goes the year” has been correct 70.8% of the time since 1929, according to S&P Global. The month reversed the dominance of the Magnificent 7 that closed out 2024, and gains were broad. Q4 2024 earnings to date are stronger than expected, with 179 issues reporting, representing 50.5% of market value. The beat rate is 77.7%, a historical high.
Bond Markets in January
The 10-year U.S. Treasury ended the month at a yield of 4.55%, down from 4.58% the prior month. The 30-year U.S. Treasury ended December at 4.80%, up from 4.78%. The Bloomberg U.S. Aggregate Bond Index returned -0.27%. The Bloomberg Municipal Bond Index returned -0.51%.
The Smart Investor
Tax season is underway. For many people, the reward of tax filing is a tax refund. Giving some thought to what you do with your refund is good practice – do you invest it? Pay down debt? Splurge?
It’s also a good idea to think about your taxes from a long-term perspective. As you go through the process of filing this year, think about setting yourself up for next year. Did you leave money on the table? Can you lower taxes by increasing tax-advantaged contributions throughout the year? How about charitable donations?
Do you own your own business? Are you maximizing tax planning to ensure you taking advantage of both deductions and write-offs?
Are you thinking of selling an asset, or have you had an inheritance? The tax implications around the timing of the sale can be significant.
Combining personal goals, investments, a view on the economy, and ensuring that all the pieces of financial planning process are engaged is at the core of what a financial advisor can bring to the table.