Impact of the CPI Report
The Consumer Price Index (CPI) for December 2024 was released on Wednesday, January 15, 2025. The report indicated a year-over-year inflation rate of 2.9%, with the core CPI increasing by 3.2%. This data (inflation) was lower than analysts and some traders had anticipated, leading to a positive market reaction.
During the week of January 13 to January 17, 2025, the S&P 500 and the NASDAQ Composite exhibited notable movements influenced by economic data and positive corporate earnings.
- S&P 500: Experienced a 2.9% increase over the week, indicating a predominance of advancing issues.
- NASDAQ Composite: Rose by 2.5% during the same period, suggesting a similar trend of more advancing than declining issues.
Market Sentiment
The release of the CPI report contributed to a slight shift in market sentiment. But do not be fooled; we are not yet even close to the extremely positive sentiment we experienced in the last quarter of 2024. Investors interpreted the data as a sign that inflation was moderating, which could influence the Federal Reserve’s future interest rate decisions. This optimism was reflected in the market’s performance, with both the S&P 500 and NASDAQ Composite posting their best weekly gains since the presidential election.
Upcoming Earnings Announcements (could increase positive sentiment)
Looking ahead to next week, several significant earnings reports are scheduled; these will shape market sentiment in the short term. To determine if the new uptrend is sustainable.
- Netflix (NFLX): Set to report earnings, with expectations of adding 8.2 million subscribers.
- GE Aerospace and GE Vernova: Both divisions of General Electric are anticipated to report solid earnings.
- Regional Banks: Institutions such as Capital One, Interactive Brokers, and Discover Financial Services are expected to post significant earnings gains. These will be looked at closely by the market. Remember commercial real estate is a lingering problem.
- American Express (NYSE: AXP) is scheduled to announce its fourth-quarter and full-year 2024 financial results on Friday, January 24, 2025, at 8:30 AM ET.
Conclusion
As of 1-10-2025, the markets gave back all the post-election gains.
The combination of easing inflation data and strong corporate earnings undeniably lifted market sentiment. (but we are nowhere near the bullishness of the last quarter of 2024. The S&P 500 found support a bit earlier than I expected, thanks to a surprisingly positive CPI report. That said, it could still drift down to the 5700 range if the earnings reports next week disappoint. Its next real test to the upside will be at the 6040 to 6070 level—if it manages to close above those levels, a new high is within reach. ( I remain cautiously optimistic but will take advantage of opportunities to take money off the table if and when they arise)
As for the NASDAQ Composite, it found support at its first technical level, though I think that level is a bit weak. The support was largely driven by the CPI report, in my opinion, as there isn’t any other major data pushing the market in one direction. The next test for the NASDAQ will be at the 20,000 mark.
Interestingly, there’s not much in terms of market-moving economic data next week. The real fireworks will come the following week, when the Federal Reserve holds its meeting. The consensus is that the Fed will leave interest rates unchanged. But, as usual, everyone will be hanging on every word Jerome Powell says after the meeting, looking for any hints that he might lower rates sooner rather than later. I’m bracing for the same old, dry response: “We will remain data-driven.” Frankly, I’m not a fan of this answer—it’s reactive, not proactive. But hey, that’s the economic world we live in, and we can’t change it is, what it is!
There is still a ton of cash on the sidelines…BUT
As of January 15, 2025, total money market fund assets stood at $6.86 trillion, a decrease of $54.89 billion from the previous week.
This decline was primarily due to a $50.98 billion decrease in government money market funds, which now total $5.63 trillion. Prime funds decreased by $936 million to $1.09 trillion, and tax-exempt funds decreased by $2.97 billion to $135.97 billion.
The decrease in government money market funds may be attributed to investors reallocating assets in response to market conditions or anticipated policy changes.
The reallocating is likely shifting into bonds, due to the recent run-up in yields. I’ve been saying for quite some time that the smart money is waiting to see the new administration’s policy changes before committing substantial funds back into the market. THIS IS WHY I HAVE BEEN SAYING TAKE SOME MONEY OFF THE TABLE IF YOU HAVE THE OPPORTUNITY! If interest rates fall, which I anticipate will happen as the year progresses, the bond market’s challenge to stocks will diminish. I anticipate that some of the substantial cash reserves will flow into stocks and not bonds once the new administration unveils its policies later this year.
I remain cautiously bullish for now. I am only buying one undervalued stock at this time to hold it. I will take money off the table if or when the opportunity presents itself.
Here’s the BUT (the fly in the ointment)
The allure of bonds yielding nearly 5%—is truly the financial equivalent of finding a unicorn in your backyard for some managers. And what a great place for them to hide during uncertainty. A no-tax low-risk federal reserve bond yielding nearly 5% or a taxable risk asset (stocks) that has stretched valuations. As the 10-year Treasury yield flirts with the 4.65% to 5% range—a self-designated “danger zone” I so graciously coined last year—smart money investors recently are flocking to the safety of bonds. After all, who wouldn’t want a guaranteed return that outshines the unpredictable rollercoaster of risk assets like stocks?
As yields approach the 4.6% to 5% mark, bonds become increasingly attractive. This is because higher yields offer a fixed income that can be more appealing than the potential volatility and risk of equities. For instance, the 10-year Treasury yield has raised over 100 basis points, from 3.6% to as high as 4.8% recently.
Moreover, bonds are considered safer than risk assets because they provide a fixed income and are less sensitive to market fluctuations. This stability is particularly appealing when compared to the unpredictable nature of stocks.
So, as the 10-year note inches closer to my self-designated “danger zone” of 4.65% to 5%, it’s clear that bonds are the safe haven investors are gravitating toward. After all, who needs the thrill of the stock market when you can enjoy the steady, predictable returns of bonds?
Investors should remain vigilant, as potential volatility could arise from future economic indicators, new policy decisions, and higher-yielding assets.
My personal belief is yields will fall as the year moves forward. But until interest rates begin that path lower, a nervous stock market will continue, and volatility will remain. (I’m raising cash when the opportunity presents itself.)