Do As I Say OR Do As I Do

Weekly Newsletter: February 24, 2025

“Nobody knows the trouble I’ve seen.” This is a recent refrain from the consumer. Based on survey data, the consumer is worried about higher inflation and according to Wal-Mart, cutting back on spending. If the consumer is the engine that makes the economy go, it is sputtering right now. This is the only data point so far that indicates trouble in River City. Employment continues to show gains, which should bolster consumer confidence. The comments from Wal-Mart were concerning Wall Street as well, taking the market down Friday by the largest margin this year. The Fed’s meeting notes indicated they remain concerned about inflation and are very much in a wait and see mode. This means that each economic data point is much more critical than the weight usually carried. It also means that the Fed does not have a good handle on the direction of the economy or inflation and therefore, has little confidence that holding pat or even cutting rates will have an impact on the economy. The dynamics of the economy are much different today than 20-30 years ago or even just before Covid.

Consumers were not the only one singing a mournful song, homebuilders confidence remains at very low levels as a combination of higher home prices and mortgage rates touching 7% have kept buyers on the sidelines. Recent earnings from the homebuilding group hinted at a building slowdown that could last well into the summer months, especially without interest rate relief. Coming this week will be the Fed’s favorite inflation indicator, the personal consumption expenditures index. There should not be much of surprise in the figure as it is compiled using already reported data within the consumer and producer price indices. The coming week, due in large part to the dirth of “big” economic data points, should be quiet. The only other data point investors will be watching are earnings from chip producer Nvidia. As other tech companies reported earlier in the month, there is a bit of a slowdown in sales. Whether that holds true with Nvidia and what they say about future sales will garner much of Wall Street’s focus next week.

A funny thing is happening as investors worry about inflation sticking at high levels, interest rates are falling. They have now dropped each week since the start of the year, with the 10-year yield dropping by about a quarter percent. Could it be that investors are not worried about inflation? Or convinced that the Fed will be cutting rates soon rather than later? Counter to the decline in yields has been the pick-up in commodity prices, rising by over 10% since early September. One of these markets will be proven right. Which one has bigger implications for both stocks and the economy.

As discussed last week, technology stocks seem to be rising for a couple of weeks and taking one off. They took the week off last week and fell by nearly 3%. It was felt in other parts of the markets as well, with small cap dropping over 3%. The big winners were outside of the US boarders, with international roughly flat while emerging markets rose by more than 1%. The theme that may be pervasive over the coming couple of years could be poor performance from technology while better relative performance from value and maybe even international. International stocks have been in the doghouse for years as investors tout US exceptionalism. The realization that there are plenty of international companies that do most of their business in the US and are selling much cheaper than their US counterparts may play a role in better performance from outside the US.

There will be plenty of chatter from Fed governors in the next few weeks. Highlights this week should be the inflation data from PCE and NVidia earnings. Fed chatter, while interesting, will likely take a backseat to the last big earnings report.

The opinions expressed in the Investment Newsletter are those of the author and are based upon information that is believed to be accurate and reliable but are opinions and do not constitute a guarantee of present or future financial market conditions.