A busy week awaits

January 28th, 2025

RECAPPING LAST WEEK

U.S. equities posted a second straight week of gains, fueled by investor optimism for artificial intelligence investment, corporate earnings, and potential pro-business policies of the new administration. The S&P500 index rose 1.7% to a record weekly closing high, erasing last month’s losses. The Nasdaq Composite also gained 1.7%, while the Russell 2000 advanced 1.4%. Energy was the lone S&P500 sector to finish lower, as crude oil slumped 3.5% on President Trump’s remarks at the World Economic Forum calling for lower oil prices. Bitcoin surged to a new record above $110k before pulling back slightly, as traders took stock of a possible U.S. strategic reserve for the cryptocurrency. U.S. Treasury yields were modestly higher in a week that lacked impactful economic data.

U.S. business activity slowed in January, but price pressures increased, according to the S&P Global flash PMI indices. The services reading fell to 52.8 from 56.8 the prior month, while manufacturing PMI edged into expansion territory at 50.1. Inflationary pressures intensified to a four-month high, with input costs and selling prices rising at increased rates across both sectors.
Continuing jobless claims reached the highest level since November 2021, suggesting new jobs may be getting harder to find. Existing home sales rose for a third straight month in December, but sales for all of 2024 were the lowest since 1995 as the housing market was pummeled by high mortgage rates and home prices along with low supply. U.S. consumer sentiment slipped in January from its initial reading while one-year inflation expectations remained steady at 3.3%.

Overseas, the Bank of Japan raised interest rates by a quarter-point to 0.5%, a move that was heavily signaled in hopes of avoiding the market turmoil from August’s rate hike. The BOJ said it would be closely watching upcoming wage negotiations for further policy adjustments. Japan’s national core CPI reached a 16-month high of 3% in December. China left its main lending rates unchanged last week, but the government continued to try to support a struggling stock market by directing state-owned insurers and mutual fund managers to channel more investment into shares.

In Europe, positive flash PMI data sent the euro soaring versus the U.S. dollar. January’s composite reading moved into expansion territory for both Germany and the Eurozone while confidence in future activity increased. Growth in British businesses flagged to begin the year and price pressures rose, highlighting the challenges facing the Bank of England. There were signs of a softening UK labor market as the unemployment rate ticked higher, but wage growth remained stubbornly strong. Finally, Canada’s inflation rate slowed in December, helped by a sales tax break, which offset a rise in retail sales.

THE WEEK AHEAD

A busy week awaits with central bank decisions, GDP updates, and fresh inflation readings on the
schedule. In the U.S., the Federal Reserve is widely expected to pause after lowering its benchmark
rate by a full percentage point last year. More benign inflation data is likely needed to tip the scales as to when another rate cut is back on the table. Friday’s core PCE price index for December is expected to reveal a slight uptick from the prior month while the annual measure stays flat at +2.8%. Wednesday’s first estimate of Q4 2024 GDP is forecasted to come in at +2.6%, down from the prior quarter’s +3.1% but still representative of a strong economy.

It’s a big week for U.S. corporate earnings with reports due from four of the “Magnificent Seven” mega-cap technology companies—Apple, Meta, Microsoft, and Tesla. The rest of the domestic economic agenda includes consumer confidence, new and pending home sales, and durable goods orders. Elsewhere, last week’s rally in the euro may be short lived as the European central bank is set to lower interest rates on Thursday by a quarter point. Another rate cut is expected in March given the region’s economic woes, so any commentary to the contrary could support the currency.

BlackRock CEO Larry Fink told delegates at the World Economic Forum that pessimism about the European economy has never been more profound than today. The Bank of Canada is also expected to cut rates on Wednesday to 3% as growth has slowed and the threat of U.S. trade tariffs looms. Inflation updates from Japan and Australia round out the international calendar.

(source: Schwab)

Definitions

Annualized Return: The rate at which an investment grows each year over the period to arrive at the final valuation.
Bear Market: A decline of at least 20% from the market’s high point to its low.
Beta: A measure of how an individual asset moves when the overall stock market increases or decreases.
Correlation: A measure of the extent to which two variables are related.
Dividend Yield: The dividend yield or dividend-price ratio of a share is the dividend per share, divided by the price per share. It is also a company’s total annual dividend
payments divided by its market capitalization, assuming the number of sharesis constant.
Developed Markets: A country that is most developed in terms of its economy and capital markets. The country must be high income, but this also includes openness
to foreign ownership, ease of capital movement, and efficiency of market institutions.
Emerging Markets: A country that has some characteristics of a developed market but does not fully meet its standards. This includes markets that may become
developed marketsin the future or were in the past.
GrowthFactor Stocks: Growth stocks are companies expected to grow sales and earnings at a fasterrate than the market average.
LargeCap Stocks: Shares of publicly traded corporationswith a market capitalization of $10 billion or more.
LTM: An acronymfor”Last Twelve Months”or the past one year.
NTM:An acronymfor”Next Twelve Months” or the next one year.
Price Return: The rate of return on an investment portfolio, where the return measure takes into account only the capital appreciation of the portfolio, not including
income generated in the form of interest or dividends.
Total Return: Return on a portfolio of investmentsincluding capital appreciation and income received on the portfolio.
Small Cap Stocks: Small-cap stocks are shares of companieswith a market capitalization of less than $2 billion.
Standard Deviation: In statistics, the standard deviation is a measure of the amount of variation or dispersion of a set of values. A low standard deviation indicates the
valuestend to be close to the historical average of the data set, while a high standarddeviationindicatesthe current value is outside of the historical average range.
Value Factor Stocks: Stocksthat are inexpensive relative to the broad market based on measures of fundamental value (e.g., price to earnings or price to book).

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