Turning In 1000 Feet

Weekly Newsletter: January 13, 2025

The annoying message from your map app when you take a wrong turn may be apt for the financial markets. They are “recalculating” following the stronger than expected jobs report. Using the weekly jobless claims figures, it should not have been a surprise that the jobs market remains strong. The weekly data, when comparing it to similar periods prior to the pandemic, matches well. The reaction to the jobs data was for equities to decline and interest rates to rise. The expectations for further rate cuts by the Fed have now shifted out to October and could be completely removed if the inflation data due this week comes in strong as well. A hint at higher inflation comes from commodity prices, which are up over 10% vs. a year ago and 7% vs. the beginning of last October. Fed officials have been hinting that they may be pumping the brakes on their rate cutting in early ’25. The bond market has already voiced their opinion as yields are up a full percentage point on the 10-year bond since the Fed started cutting rates in September. Investors are hoping the new directions do not wander too far afield and the markets can regain their footing.

The jobs report was the key feature last week. The creation of over 250k in new jobs was nearly 100k more than expected and sent analysis back to the blackboard to figure out not only the economic trajectory for 2025, but also the Fed’s decisions to cut rates. The stronger data could generate additional profits, which may hearten investors, but taking away lower rates has them in a twist. In addition to inflation data, retail sales will be released for the Christmas season. Based on ancillary data from MasterCard and others, spending was brisk. The wage gains of over 4% in the jobs report for the past few months have put consumers in a spending mood, despite higher prices. Of course, the Fed governors will be chatting up their views on the economy, interest rates and when inflation might finally hit their target. Chair Powell, at the press conference following the last meeting, hinted at a slower pace of cuts. That is likely to be reiterated this week considering the strong jobs data and likely still sticky inflation.

The bond model continues to point to higher interest rates, as the momentum of commodity prices and yields are now firmly higher. Worries about the deficit are beginning to get discussed more frequently now that interest rates are higher. The government has been fortunate to pay very low rates for the past 10 years, that is now changing, and those higher payments will put additional pressure on an already bloated budget. Since 2000, money taken in has been growing at just over 4%, slightly behind overall economic growth of 4.5% during that same period. However, spending has been growing at nearly 6% over the past 22 years (2022 is the last data point available). Until spending changes, the deficit will continue to be a large and growing problem going forward.

The decline in the market to start out the year has presaged a poorer overall year than normal. However, last year had a similar pattern before the market rallied 20%+ for the year. The decline in the market did shine a bit of light on some of the “better” parts of the market, like value (vs. growth/technology), energy and healthcare. Healthcare has been in the sick ward for quite some time, underperforming the market and even value stocks, since the beginning of Covid. Compared to the value index, healthcare has not been this cheap in over a decade. Political pressures have impacted the sector and those may not relent quickly, but valuations are reasonable for an investor willing to hold for the next 3-5 years. Energy had a good run after the post-Covid economic re-opening, following a decade of underperformance as well. Whether these two sectors can provide a port in a storm or are experiencing a short resurgence, time will tell. But these two sectors are worth watching.

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.