Commentary for February, 2025

Hello all - we hope had a nice February.

For the markets, February started out nicely, but the latter part of the month saw stocks move sharply lower.  In the end, the Dow lost 1.6%, the S&P 500 fell 1.3% and is now flat on the year, and the Nasdaq, which has a higher concentration of tech stocks, plunged 4%. 

Here’s a chart of the markets this month:

Bonds were again an interesting story this month.  Bond yields have been falling sharply (so bond prices are rising), which has been attributed to worries about the economy. Investors sell stocks and move into bonds, pushing up the price and pushing down the yield. 

Gold was another big story.  Like bonds, investors have been pouring into gold on worries of a global trade war.  Gold prices are at record highs. 

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TRUMP

Nearly all the moves in the market this month were due to President Trump.  It’s simple to explain -  when tariffs were announced, the market fell.  When it looked like tariffs would be postponed, markets rose.

Here’s a look at the how it played out:

- 10% tariffs announced on Canada and Mexico
    Stocks fell

- 10% on China
    Stocks fell

- Tariffs on Canada and Mexico put on hold
    Stocks rose

- 25% on steel and aluminum
    Stocks fell

- Reciprocal tariffs on everyone
    Stocks fell

- Possible copper tariffs
    Stocks fell

- 25% on the EU
    Stocks fell

- 10% tariffs on Canada and Mexico – back on
    Stocks fell

- Another 10% on China
    Stocks fell

We can decisively say, the enthusiasm among investors for the Trump presidency has disappeared.  As an investor, there is nothing more frustrating than random policy announcements that have significant impacts on the market.  It makes our markets uninvestable.  

In fact, we’re seeing more investors put their money overseas as European markets have seen a solid rise.  The European Stoxx index (like our S&P 500) is up nearly 10% this year.  The S&P is flat.  It’s not a coincidence. 

 

Businesses are extremely frustrated, too.  They are unable to make plans for their operations when major policy changes are haphazardly announced.  

Additionally, manufacturing cannot be found in the U.S. in the way policy leaders think, and the cost is too high to build here.  Tariffs to bring manufacturing back to the states will probably backfire and result in higher prices for everyone.  
 
Maybe these random tariffs on our friends and foes alike will result in something positive in the long run.  Maybe this is just posturing to get the upper hand in negotiations.  Right now, though, it is causing serious headaches for investors.

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EARNINGS

Corporate earnings for the end of 2024 have been coming in this month and the results have been very solid.  Earnings are on pace to grow 18%, the highest level since 2021.  Revenue, or what a company earned in their sales, is up 6%.  These are very good numbers.  

Unfortunately, the earnings news has been drowned out by news from Washington and have had little impact on the markets.  

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ECONOMY

While there are economic concerns out there, most of the indicators we follow look a little more positive.

First, we’ll look at the bond yield curve, which is something we’ve talked about a lot recently.

The last few months we’ve posted these charts that showed when the green line pops back above the solid black line, a recession follows.  This month, we’ve zoomed in on that chart to show the green line is no longer rising.  It still tells us a recession is out there, but its probably not coming soon.

The next chart shows a different bond maturity, and its clearer that a recession is not as likely right now.

The leading indicators we post every month again showed a decline, so that does remain a concern.

An estimate for the strength of the GDP for the first quarter of this year took a surprisingly sharp drop on recent data.  This is concerning.

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INFLATION

Let’s take a look at the inflation data from this month, where the annual inflation rate seems to be on the rise again.

That metric is looking at inflation from an annualized measurement (counting the previous 12-month numbers).  When you look at inflation month-by-month, inflation is still rising and prices continue to go higher. 

When excluding energy and food from the calculation (which economists call the “core” measurement), we can see inflation still rising solidly every month. 

As for inflation at the business level, or the PPI, it saw yet another monthly gain.   

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OTHER ECONOMIC DATA

Economic data released this month was mixed.

The manufacturing side of our economy showed a solid improvement, though the service side was a little weaker.

Retail sales saw its first decline in five months.

Durable goods (these are items with a longer life, like a phone or refrigerator) was flat.

Consumer confidence figures were big news this month as they all fell sharply.  The constant tariff drumbeat and sour mood in the press sent consumer confidence down by the most in three years. 

Small business optimism fell too.

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Where does the market go from here?

We think stocks are at an attractive level here.  Frankly, they’ve felt like they want to go higher all month, but were slammed lower with every tariff announcement.  Investors have to stay on their toes, though.  

What makes us optimistic is that investors are very pessimistic.  It’s a good signal that often happens at market bottoms.

Here’s a look at investor sentiment:

Another good sign is we are entering a historically positive time of the year for the markets.

This commentary is for informational purposes and is not investment advice, an indicator of future performance, a solicitation, an offer to buy or sell, or a recommendation for any security. It should not be used as a primary basis for making investment decisions. Consider your own financial circumstances and goals carefully before investing. Past performance cannot guarantee results.

Commentary for January, 2025

Hello all - we hope your January was a nice one.

The year got off to a good start for the markets,  The Dow was the top performer, gaining 4.8%, the S&P 500 added 2.8%, and the Nasdaq, which has a higher concentration of tech stocks, was up 1.7%.  As goes January, so goes the year – we hope!

Here’s a chart of the markets this month:

Here’s a look at how the various sectors performed on the month:

Bonds were an interesting story this month.  They started January with yields rising sharply, so prices fell sharply.  This often happens when investors are worried about the economy.  

However, the rise in yields only lasted a few days into January.  Yields quickly reversed and finished the month lower.

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TRUMP

Most of the oxygen in the stock market this month was consumed by President Trump.  Every day, the news cycle was dominated by policies coming out of the new administration.  

There is a widespread belief that this administration will be favorable to business and the economy.  We can see it in the data, with business confidence rising sharply after the election. 

 

The one concern remains around tariffs.  Investors don’t want to see tariffs and were relived when Trump did not announce new tariffs on “Day 1” like he pledged. Stocks rose as a result.

However, by the end of the month, he announced new tariffs would come on February 1st.  Both Canada and Mexico would see 25% tariffs and China would see 10%.  This caused markets to buckle.

Then the drama intensified.

On the last day of January, the administration announced the new tariffs would not take place February 1st, but March 1st.  This reassured investors and stocks rose on the news.

A few hours later, the government announced tariffs would not be implemented on March 1st, as the market hoped for, but on February1st.  Stocks fell sharply on the news.

Will the tariffs work as a negotiating tool?  Maybe, maybe not.  That’s outside the scope of this newsletter.  What they did do is ruin any goodwill with investors.  

Investors were excited for the pro-business policies and that’s why stocks have been higher.  These new tariffs – whether they work or not – have created a new unknown variable that investors must consider.  One tweet or comment can now send stocks plunging.  Its something that makes a bad environment for investors.      

We’ll close out this section with an interesting chart showing how high tariffs used to be.

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TECH

After being the market leader for months, if not years, the tech sector took a big hit this month.  

A lot of the excitement in tech has come from the boom in AI.  Nvidia, for example, makes the computer chips used in these AI systems.  Companies spent billions on these chips to create their AI models.  This made Nvidia, and others like it, some of the most valuable companies in the world.  

That AI excitement quickly became panic when it was reported that a Chinese company could make these same AI models for a tiny fraction of the cost.  If true, it would mean companies wouldn’t need to spend as much on AI.  

This sent the tech stocks sharply lower.

We actually think this is a positive development.  It could save companies billions of dollars, which is obviously a positive.  Either way, we think this is a story that will be around for a while.

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FED

The Fed held another policy meeting this month, though it had little impact on the markets. They announced no change in their policy and kept interest rates at their current level.  

They seem less likely to lower interest rates again any time soon.  They continue to talk about inflation concerns – a concern that was notably absent the previous four years.  Interesting how that works.

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ECONOMIC CONCERNS

We continue to see worrisome signs in many of the indicators we follow.

First, we’ll look at the yield curve, which is something we’ve talked about the last several months.

In the chart below, note how the blue line dips down and pops back above the black horizontal line.  Every time this happens a recession follows (a recession is noted by the gray shaded area). This is something that is occurring again right now.

Here’s a similar chart, but with a different bond maturity.  It, too, shows the risk of a recession has increased.

Then there’s the soft data that signal a tougher economy.  More and more people are struggling to pay their bills.  Credit card defaults are rising and more people are only making the minimum monthly payment.  This is something that tends to happen around recessions.

Bankruptcies are also on the rise again.

 

Another recession indicator we talk about every month is the leading economic indicators.  This index combines several indicators that tend to signal the direction of the economy (like weekly unemployment numbers, building permits, etc.).  

This index showed a sharp improvement last month, but again fell this month.  The chart is a little noisy this month.

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INFLATION

Let’s take a look at the inflation data from this month, where the annual inflation rate had been moving lower, but the decline has now stalled.

 

That metric is looking at inflation from an annualized measurement (counting the previous 12-month numbers).  When you look at inflation month-by-month, inflation is still rising and prices continue to go higher. 

When excluding energy and food from the calculation (which economists call the “core” measurement), we can see inflation still rising solidly every month. 

Even though inflation clearly rose again this month, the press cheered the report as a decline in inflation.  The markets even rallied strongly on the report.  

Why?

Even though we can see a rise in the monthly ‘core’ report, investors only consider the last 12 months of data for the annual number.  As we can see in the ‘core’ chart above, some of the larger monthly figures are no longer being considered and this makes the annual inflation rate look smaller.  So even though inflation rose last month, the last 12 months don’t look as bad.

As for inflation at the business level, or the PPI, it saw another monthly gain.

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OTHER ECONOMIC DATA

Economic data released this month was mixed.

While we expressed our concerns about the economy earlier, the GDP report showing the strength of the economy did quite well last quarter with an increase of 2.3%.  Any number over 2% is considered good, but it’s important to note that it is a decline from the previous two quarters.

The strength of the manufacturing and service parts of our economy both showed an improvement last month.

Retail sales saw an increase on the month. 

However, durable goods (these are items with a longer life, like a phone or refrigerator) showed a decrease.

Consumer confidence saw a surprising drop, too:

Small business optimism moved sharply higher after the election.  It’s interesting to note that it also saw a sharp move higher after the last Trump election, too.

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Where does the market go from here?

Stocks are moderately expensive on a short term basis here.  There may be some room to run higher, but we’d be cautious.  Especially with the frequent changes in policy coming from the White House.  

Looking at history, February’s in the first year after the election tend to be the worst month of the year. 

 

Several other historical charts don’t paint a pretty picture, either.  Here are a few we found interesting, with no explanation needed:

This commentary is for informational purposes and is not investment advice, an indicator of future performance, a solicitation, an offer to buy or sell, or a recommendation for any security. It should not be used as a primary basis for making investment decisions. Consider your own financial circumstances and goals carefully before investing. Past performance cannot guarantee results.