Markets Blog
David Matzko, LPL Research
LPL Research provides its Weekly Market Performance for the week of January 6, 2025. Stocks extended last week’s slide with relatively measured losses for the second week in a row. A strong start quickly faded as lingering tariff concerns and jitters around Federal Reserve (Fed) Chair Jerome Powell & Company’s rate-cutting path sparked a risk-off tone. Meanwhile, overseas, European equities gained ground, and Asian markets were weighed down by weak sentiment around the Chinese economy. Treasury yields jumped, while oil and the dollar strengthened.
Index Performance
U.S. and International Equities
U.S. Equities: Stocks started the week on a bright note, however, major averages remained in the red to end another abbreviated week. The tech-heavy Nasdaq Composite faced the largest weekly decline, shedding 2.1%, while the Dow and S&P 500 ended 1.7% lower. Value stocks outperformed their growth counterparts again this week, while small caps ended 3.5% lower.
Markets received another lift from the artificial intelligence (AI) secular growth theme to kick off the week as the annual Consumer Electronics Show (CES) in Las Vegas prepared for its keynote address from NVIDIA (NVDIA) CEO Jensen Huang. Huang announced a raft of new chips, software, and services in the works from the semiconductor giant, briefly buoying tech stocks and the broader market. However, equities failed to overcome strong headwinds from ongoing legislative and tariff concerns after President-elect Trump denied reports of watered-down tariffs plans with less than a month before Inauguration Day. Additionally, investors displayed some jitters around the Federal Reserve (Fed) rate-cutting cycle as macro data proved to be a mixed bag leading up to Friday’s much-anticipated jobs report. Stock exchanges were closed on Thursday in remembrance of former President Jimmy Carter, giving investors plenty of time to mull over the Fed’s potential path. Speculation of a slower rate-cutting cycle was reinforced on Friday as nonfarm payrolls in December blew out expectations while the unemployment rate ticked back down to 4.1%. Stocks sold off in response as Wall Street slashed rate cut bets. Meanwhile, the first December quarterly earnings reports began to trickle in ahead of the unofficial start of earnings season next week. Shares of Delta Airlines (DAL) and Walgreens (WBA) traded higher after both companies topped earnings forecasts.
International Equities: European stocks traded higher this week, although it was not a one-way street higher. Equities faced chopping trading over the last five days, overcoming lingering U.S. tariff concerns, pressure from rising government bond yields, and a slide on Friday due to reduced Fed rate cut bets. However, on the home front, European Central Bank (ECB) rate cut odds received a boost after data revealed that eurozone inflation rose in line with consensus estimates, pushing equities higher. Additionally, the U.K. was in focus, underperforming major European markets, amid recent volatility. The U.K. Treasury was forced to defend government policy as bond prices sank over the last few days, plus, reports indicated Chancellor Reeves had requested alternative plans from finance ministers to aid economic growth.
Asian equities ended the week mostly lower. Stocks received a boost at the beginning of the week from AI enthusiasm and optimism and hopes of watered-down tariffs from the incoming administration. But as tariff concerns began to take hold again, the sentiment across the region was dragged down further by Chinese economic worries. Chinese data revealed that inflation continued to fall, setting back economic stimulus efforts from the government and hopes of a rejuvenated economy. Hong Kong and mainland China printed a weekly decline, as did Japan. The tech-leaning exchanges of Taiwan and South Korea were the only major markets to deliver a weekly gain.
Fixed Income, Currency, and Commodity Markets
Fixed Income: The Bloomberg U.S. Aggregate Index traded lower this week. After easing slightly each day, Treasury yields experienced strong upside pressure as rate cut bets were updated following Friday’s blowout jobs report. The 10-year Treasury yield ended the week just shy of 16 basis points higher (0.16%), while the rate sensitive two-year yield rose nine basis points since Monday (0.09%).
As the recent back up in Treasury yields extended into this week, more focus began to flag upward pressure on government bond yields around the globe. U.S. Treasury yields have largely been headed in one direction since last September, with the 10-year higher by over 1% since the recent lows. Meanwhile, global bond yields have marched higher as well with developed markets bearing the brunt of the increase. U.K 10-year bond yields (gilts) recently touched their highest levels since 2008 (30-year highest since 1998) with other Eurozone bond yields following suit. Even Japanese bond yields (JGBs) have moved higher recently with the 30-year JGB yield higher than the 30-year Chinese government bond yield for the first time in history. Stubborn inflationary pressures and concerns about the amount of debt issuance by sovereign borrowers over the next few decades have bond investors pushing back against still relatively low interest rates. According to the International Monetary Fund (IMF), global debt levels are expected to exceed $100 trillion, or about 93 percent of global gross domestic product (GDP) by the end of this year and will approach 100 percent of GDP by 2030. We warned about bond vigilantes and, after taking a brief hiatus, it looks like they could be back en masse. The silver lining is that bonds are offering attractive income opportunities again, but unless/until economic data softens, we could see further upward pressure on global bond yields.
Commodities and Currencies: The Bloomberg Commodities Index ended the week sharply higher with nearly a 4.1% gain. West Texas Intermediate (WTI) crude oil trading was relatively rangebound for the majority of the week, until Friday. Crude oil tested multi-month highs as fear of potential U.S. sanctions on Russian oil rose as reports of potentially harsh sanctions could be on the horizon. This marked the third consecutive weekly gain for crude oil, which continues to find support from cold weather, reduced U.S. stockpiles, and policy concerns. Gold traded higher in a steady rise over the last five days. The yellow metal continued extended gains following Friday’s jobs report, despite rising Treasury yields and a stronger dollar. Gains alongside yields and the dollar could indicate some unease among investors from geopolitical uncertainties, among other factors. Silver and copper both delivered strong weekly gains. The dollar advanced 0.6%, boosted by labor market data and, in a separate report from the University of Michigan, an unexpected rise in inflation expectations. Precious and industrial metals broadly advanced, while soft commodities were little changed.
Economic Weekly Roundup
A Blow-Out Jobs Report. Payrolls grew by 256,000 in December and the unemployment rate changed little at 4.1%. In 2024, the average monthly gain was 186,000, down from the 2023 average of 251,000 per month. Private payrolls average monthly gain was only 149,000, down from 192,000 in 2023. The unemployment rate has been unusually stable, hovering at either 4.1 or 4.2% for the past 7 months. The long-term unemployed accounted for 22.4% of all unemployed people in December. Pre-pandemic, the percentage of long-term unemployed trended downward to 20%. Average hourly earnings rose 3.9%, more than offsetting the pace of inflation. Over 16% of those not in the labor force, are foreign born – which includes undocumented immigrants – so the economic impact of tighter immigration policy may not be as detrimental as some suggest.
Despite the blow-out report Friday morning, the 2024 average monthly gain in private payrolls of 149,000 was cooler than the 2023 average of 192,000. Investors should expect another step downward in 2025. In the meantime, the Fed will keep rates unchanged unless we see significant cooling in the job market.
Fed Minutes Summarized by “Uncertainty.” The minutes of the December Fed meeting were riddled with “uncertainty” or a derivation thereof. The word “uncertain” or a derivation thereof was mentioned twelve times throughout the official record from the Federal Open Market Committee. Forecasters find it increasingly difficult to model out the path for interest rates, growth, and inflation because of the uncertainty surrounding Trump policies still being developed. The Committee highlighted the underperformance of foreign markets relative to the U.S., in part reflecting expectations of growth diverging further between the U.S. and the rest of the world. Somewhat surprisingly, Fed officials think “the strength of economic activity was unlikely to be a source of upward inflation pressures.” The disinflationary process may have temporarily stalled, although Fed officials still expect inflation will continue to move toward 2%.
The Week Ahead
The following economic data is slated for the week ahead:
Monday: New York Fed 1-Year Inflation Expectations (Dec), Federal Budget Balance (Dec)
Tuesday: NFIB Small Business Optimism (Dec), PPI Final Demand (Dec)
Wednesday: MBA Mortgage Applications (Jan 10), Empire Manufacturing (Jan), CPI (Dec), Real Average Hourly Earnings (Dec), Real Average Weekly Earnings (Dec)
Thursday: Retail Sales Advance (Dec), Import Price Index (Dec), Export Price Index (Dec), Philadelphia Fed Business Outlook (Jan), New York Fed Services Business Activity (Jan), Initial Jobless Claims (Jan 11), Continuing Claims (Jan 4), Business Inventories (Nov), NAHB Housing Market Index (Jan)
Friday: Housing Starts (Dec), Building Permits (December preliminary), Industrial Production (Dec), Capacity Utilization (Dec), Manufacturing (SIC) Production (Dec), Net Long-term TIC Flows (Nov), Total Net TIC Flows (Nov)
IMPORTANT DISCLOSURES
This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors. To determine which investment(s) may be appropriate for you, please consult your financial professional prior to investing.
Investing involves risks including possible loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk.
Indexes are unmanaged and cannot be invested into directly. Index performance is not indicative of the performance of any investment and does not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results.
This material was prepared by LPL Financial, LLC. All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy.
Unless otherwise stated LPL Financial and the third party persons and firms mentioned are not affiliates of each other and make no representation with respect to each other. Any company names noted herein are for educational purposes only and not an indication of trading intent or a solicitation of their products or services.
Asset Class Disclosures –
International investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors. These risks are often heightened for investments in emerging markets.
Bonds are subject to market and interest rate risk if sold prior to maturity.
Municipal bonds are subject and market and interest rate risk and potentially capital gains tax if sold prior to maturity. Interest income may be subject to the alternative minimum tax.
Municipal bonds are federally tax-free but other state and local taxes may apply.
Preferred stock dividends are paid at the discretion of the issuing company. Preferred stocks are subject to interest rate and credit risk. They may be subject to a call features.
Alternative investments may not be suitable for all investors and involve special risks such as leveraging the investment, potential adverse market forces, regulatory changes and potentially illiquidity. The strategies employed in the management of alternative investments may accelerate the velocity of potential losses.
Mortgage backed securities are subject to credit, default, prepayment, extension, market and interest rate risk.
High yield/junk bonds (grade BB or below) are below investment grade securities, and are subject to higher interest rate, credit, and liquidity risks than those graded BBB and above. They generally should be part of a diversified portfolio for sophisticated investors.
Precious metal investing involves greater fluctuation and potential for losses.
The fast price swings of commodities will result in significant volatility in an investor's holdings.
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