January 18, 2025 Market Update

This past week, the Dow surged 3.69%, as investor optimism grew following better-than-expected economic data.  The S&P 500 and Nasdaq indexes also advanced, gaining 2.91% and 2.45%, respectively.  Small-cap stocks, as measured by the Russell 2000 index, recovered from last week’s rout by posting a 3.96% gain.

Most sectors of the bond market also posted gains during the week as the treasury yields retreated.  The Vanguard Total Bond Market (BND), a proxy for the aggregate U.S. bond market, posted a weekly gain of 1% after trending down for over a month.

Inflation data took center stage this week with the release of the Consumer Price Index (CPI) and Producer Price Index (PPI) readings for December.  December’s CPI report showed headline inflation rising 3.2% year-over-year, a slight uptick from the prior month.  However, investors focused on the core CPI, which excludes volatile food and energy prices and decelerated to a 2.8% annual pace, marking the slowest growth since June and signaling potential progress in taming inflation. 

The PPI report showed moderation in the prices producers pay for goods and services.  Headline PPI rose 1.6% year-over-year, down from November, while core PPI slipped to 2.4%.  These readings suggest easing price pressures at the wholesale level, potentially paving the way for further consumer-level disinflation.

Markets welcomed the pricing data, reviving hopes that the Federal Reserve might cut interest rates at least once this year.  The 10-year Treasury yield dropped to 4.65%, and the S&P 500 logged its biggest one-day gain since November after the reports.

The market’s reaction to last week’s reports highlights the outsized influence of inflation data and Federal Reserve policy expectations on stock and bond prices.  This dynamic will likely persist until another development draws Mr. Market’s focus.

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