January 11, 2025 Market Update

This past week, the Dow dropped by 1.86%, as investor sentiment remained cautious amid rising bond yields and mixed economic data.  Weighed down by weakness in technology stocks, the S&P 500 and Nasdaq Indexes also declined 1.94% and 2.34%, respectively.  The small cap stocks struggled to a greater extent as the Russell 2000 index, a proxy for small-cap stocks, fell 3.49%.

The fixed-income markets also experienced some volatility with the 10-year Treasury yield rising 18 bps for the week, reflecting heightened expectations of rates staying higher for longer.  The overall bond market, as measured by the Vanguard Total Bond Market Fund (BND), dropped by 0.85% for the week.

Could the Fed decide to leave interest rates where they are for all of 2025?  That possibility, dismissed as unlikely just a few months ago, is now being seriously debated on Wall Street.

Persistent inflation above the Fed’s 2% target would encourage keeping rates elevated to curb further price increases.  Similarly, a strong economy—with resilient growth, a robust labor market, and stable financial conditions—might eliminate the need for additional stimulus.  The Fed may also opt to hold rates steady to evaluate the delayed effects of its prior decisions, as monetary policy often takes time to fully impact the economy. 

A decision to maintain current rates throughout 2025 would be met with disappointment on Wall Street, particularly if driven by persistently high inflation.  Elevated rates increase borrowing costs and weigh on valuations, especially in rate-sensitive sectors such as real estate and utilities.

Economic data released last week did little to suggest the Fed will have to stimulate the economy by lowering rates anytime soon.  Job openings climbed to 8.1 million as of the end of November, initial jobless claims during the first week of the year fell to a 10-month low, non-farm payrolls increased by 256,000 in December, and the unemployment rate edged lower to 4.1%, according to Labor Department data.  In addition, the ISM Services Purchasing Managers’ Index, which tracks ordering activity in the sector, rose from 52.1 in November to 54.1 in December 2024, signaling economic expansion.  

For now, the futures markets indicate that Mr. Market expects two 0.25% rate cuts in 2025, which would bring the Fed’s target rate to 3.75 - 4.00%.  We will keep you apprised on future developments.

That’s all for now.  Have a great weekend, and invest wisely, my friends.