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WEEK AHEAD
January 13-17, 2025
As the S&P 500 moving averages have been softening for the time being, economic fundamentals continue to provide a counterbalance, keeping our tactical models balanced albeit softened and fully invested for the time being.
As the 2025 curtain rises, equity markets hobbled out of the gate as the S&P 500 shed 1.91% for the week, offsetting the previous week's gains, proving for the time being that good economic news can be bad news for stocks. Why? Because Wall Street was leaning on a storybook of Fed rate cuts, that is starting to sound like a fairy tale. Strong economic data suggests the Federal Reserve might keep its foot on the rate-hiking pedal a little longer as Fed Chair Powell mentioned last November, "If the economy remains strong and inflation is not sustainably moving toward 2 percent, we can dial back policy restraint more slowly."
Friday's jobs report threw cold water on any dovish dreams. The U.S. unemployment rate ticked down to 4.1% from 4.2%, while nonfarm payrolls smashed expectations by adding 256,000 jobs (forecast: 155,000). The labor force participation rate held steady, signaling that workers are returning to their jobs and staying in them. If that wasn't enough, the JOLTs job openings data revealed a surprisingly robust 8.098 million vacancies, highlighting persistent labor demand despite tighter financial conditions.
Consumer spending remains equally buoyant, with retail sales showing strength in the post-holiday season. Nordstrom's decision to raise its sales outlook underscores a robust appetite for discretionary goods despite elevated interest rates. This economic strength pushed 20-year Treasury yields past the 5% mark for the first time since the financial crisis, steepening the yield curve and signaling investor expectations for higher-for-longer rates. Bond markets are now recalibrating, after returning -0.87%, to reflect the likelihood of sticky inflation and a slower-than-expected pace of monetary easing.
Meanwhile, Taiwan Semiconductor Manufacturing Company (TSMC) announced a record-breaking quarterly revenue of $26 billion, a 39% year-over-year surge fueled by the AI boom. The company's results underscore the transformative impact of artificial intelligence across industries, from cloud computing to autonomous vehicles. As demand for advanced chips surges, TSMC's capital expenditures are also climbing, signaling continued growth as its full earnings report is released on Jan. 16.
But it wouldn't be a week in America without some headlines from President-elect Trump. Among his latest musings are renaming the Gulf of Mexico to the Gulf of America, buying Greenland (again), and inviting Canada to join the Union as the 51st state. Love him or loathe him, the man knows how to dominate a news cycle.
The week ahead is set to be pivotal as markets focus on key economic data releases and major events that will shape the outlook for 2025. Critical indicators include the Producer Price Index (PPI), Consumer Price Index (CPI), NFIB Small Business Optimism Index, and Industrial Production and Capacity Utilization, which will provide insight into inflationary pressures, business sentiment, and economic momentum heading into the new year. Adding to the market's focus, the earnings season begins with a spotlight on financial heavyweights, including JP Morgan, Wells Fargo, BlackRock, Citigroup, and others, offering a gauge of the sector's health and broader economic implications.
On the policy front, the upcoming inauguration of President-elect Trump on Jan. 20 raises anticipation around potential policy shifts and the Trump trade to make an impact. Meanwhile, investors will closely watch the Federal Reserve's first FOMC meeting of 2025 on Jan. 29, where interest rate guidance and monetary policy will be under intense scrutiny amid evolving economic conditions. Together, these developments will set the tone for markets and policy expectations in the weeks and months ahead.
"President Trump, who's a very skillful negotiator, is getting people to be somewhat distracted by that conversation (in reference to Trump talking about making Canada the 51st state), to take away from the conversation, around 25% tariffs on oil & gas and electricity and aluminum and lumber and concrete and everything the American consumer buys from Canada is suddenly going to get a lot more expensive if he moves forward on these tariffs."
— Canadian Prime Minister Justin Trudeau, CNN Jake Tapper, Jan. 9, 2025
Working Man: Jobs, Jobs, Jobs!
Friday saw the markets down despite what looked like great news for the economy and FED. It was announced that the December U.S. unemployment rate dropped to a rate of 4.1% from a previous 4.2%. Additionally, nonfarm payrolls increased by 256,000 in December and hourly earnings rose 0.3% to cap a year-on-year rise of 3.9%.
Quite the opposite of a slowdown, there has been a broad indication of job growth across many industries, including retail, healthcare, leisure, and hospitality. This might explain the recent pullback in markets given that this data supports the FED pause in rate cuts and potentially sets up a string of ongoing robust employment reports that would cause inflationary fears to resurface, at least from a wage perspective, yet supporting the theory that consumption will remain steady.
Hopefully, this is an early good sign for the earnings reports coming in earnest next week, starting with financials like Wells Fargo, JP Morgan, Goldman Sachs, and many others. The strength of the market has been justified by a solid forecast of S&P 500 earnings for the 4th quarter, which is up for the year by around 9.5%, taking out the energy sector year-over-year, which is closer to 12.4%. As of this writing, the short list of reports is already there, and about 75% have reported above expectations. See the Refinitiv chart below for sector forecast earnings and revenue growth.
Advisory services offered through Sowell Management, a Registered Investment Advisor. The views expressed represent the opinion of Sowell Management. The views are subject to change and are not intended as a forecast or guarantee of future results. This material is for informational purposes only. It does not constitute investment advice and is not intended as an endorsement of any specific investment. Stated information is derived from proprietary and non-proprietary sources that have not been independently verified for accuracy or completeness. While Sowell Management believes the information to be accurate and reliable, we do not claim or have responsibility for its completeness, accuracy, or reliability. Statements of future expectations, estimates, projections, and other forward-looking statements are based on available information and Sowell Management’s view as of the time of these statements. Accordingly, such statements are inherently speculative as they are based on assumptions that may involve known and unknown risks and uncertainties. Actual results, performance or events may differ materially from those expressed or implied in such statements. Investing in securities involves risks, including the potential loss of principal. While equities may offer the potential for greater long-term growth than most debt securities, they generally have higher volatility. International investments may involve risk of capital loss from unfavorable fluctuation in currency values, from differences in generally accepted accounting principles, or from economic or political instability in other nations. Past performance is not indicative of future results.