Gray Matters

Weekly Newsletter: January 20, 2025

“Behind every silver lining is a dark cloud” or “Every silver lining has a touch of grey”. Both quotes (George Carlin & Grateful Dead) may have captured the essence of the inflation data last week. The financial markets were very excited to see producer prices coming in a bit low, while the consumer prices hit expectations. But there are plenty of grey areas in the details. Consumer prices rose at a 4.8% rate for the month, while the last twelve months came in at 2.9%. Both are well above the Fed’s target of 2%. Housing “rents”, the largest portion of CPI, rose at 0.3% for the month, below the headline figure. Energy prices were the main culprit in the higher print. Commodity prices in general have been rising steadily over the past few months and could keep the pressure on inflation data in the months ahead. The financial markets saw the silver lining and put in their best week in two months with the SP500 just under the 6000 level first breached in December. The economic calendar is light this week, but there will be plenty of things to keep Wall Street hopping, from earnings to the new administration.

In typical Wall Street style, the beginning of the year had the Fed cutting rates by 0.50%, estimated to begin early in the year. After the jobs report, the estimates went to just one happening in October. Following the inflation data, the cut(s) got moved up to June. This is what being data-dependent looks like and why the markets are so jittery. Earnings season kicked off with the banks providing good news from their trading desks. The “basic” business of banking, loans, contracted some during the fourth quarter. Earnings get into full swing following the MLK holiday and for the following three weeks. Comments about the coming months/quarters will be of interest rather than what was done last year. One final note on the economic data. Much of the focus was on inflation, however, retail sales were released last week as well. Adjusting for inflation, retail sales rose just 1% last year vs the “headline” sales rising nearly 4%. The take-away, consumers are bringing home less when adjusting for the higher prices paid at the registers. So while the markets may be cheering “better” inflation, the consumer is still feeling the sting.

Interest rates rallied a bit along with the market in response to the economic data. The modest decline in rates has not turned the bond model positive. The yield curve is positively sloped, albeit modestly so. The key feature of the bond market is the higher yields even as the Fed has cut rates. Now that commodity prices have been picking up, interest rates could continue to rise, even if the Fed signals its desire to cut rates.

Financials led the earnings parade last week with plenty of fanfare. There were some issues within the banking reports as well. Most benefitted from trading and investment banking (mergers/acquisitions), but the “old style” banking of making loans suffered. A general increase in loan losses may become a harbinger of a struggling consumer sometime later this year. The decline in the market that began in December seems to have reversed as the net number of advancing to declining stocks improved. The equal-weighted index performed better than the size-weighted index, meaning a big portion of the SP500 did well vs. the behemoths in the index. One sign that the rally may continue is sentiment, which reached its lowest level in over a year. Usually, when investors are most pessimistic (or euphoric) it is a good time to head the other way.

Another shortened trading week along with a new administration and earnings season should provide enough to keep investors busy. Expect volatility to remain a feature of the market in the weeks ahead.

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.