For the week, the equity markets continued their 2024 trends, with the S&P 500 notching a new record high on Thursday (tech led the way). The table shows a strong weekly gain in each of the major indexes and significant gains so far in 2025.
It is a similar story for the Magnificent 7 excluding Apple. Those six (NVDA, MSFT, AMZN, META, TSLA, and GOOG) are up an average of nearly 6% so far in 2025. Meta and Google hit new record highs this past week. Uncharacteristically, Apple (AAPL) is the laggard, off -3.1% for the week and a whopping -11% so far in 2025.2 8
The really big story for the week in the business/economics realm was the rise in interest rates in the face of a softening economy. The 10-Year Treasury yield has been unusually volatile – from its September 16th low of 3.63%, to its 4.79% peak on January 13th (closing at 4.62% on Friday January 24th).1 7 Wall Street is attributing such volatility to “policy uncertainty” in the second Trump Administration. If this is true, then, over the next three months, most of the uncertainty (and thus volatility) will dissipate, as the markets will have a better handle on the Trump budget, tariffs, and the Fed’s reaction to it all.
The Fed
Currently, markets have only priced in one interest rate reduction by the Fed for all of 2025. To us, this appears to be significantly on the low side. Here’s why!
- The aftermath of the hurricanes in the southeast as well as the California fires will certainly pull forward demand for autos (as will the likely termination of the Electric Vehicle subsidies). In addition, the tariff threats are exerting a distorting impact on imports as merchants order inventories prior to threatened tariff enactment. So, today’s high demand will fall below normal in upcoming quarters as consumers will have been satiated.
- Even despite such distortions, we are already witnessing a slowdown in economic activity. According to Rosenberg Research, preliminary November data indicate that real GDP growth slowed to just +0.5% (annual rate), significantly lower than the +2.7% Q3 real GDP growth.9
- As seen from the chart, Industrial Production remains bogged down in Recession.6 While December’s index was positive (+0.9%), Q4’s annual rate of growth was -1.1% on top of Q3’s -0.8%.
It is clear from the chart that the manufacturing sector has been in Recession for the past year. But, so too has housing. On a year/year basis, housing starts have been negative for most of the past 18 months.5 Non-Residential Construction is barely positive when looked at over the past year.3
In addition, the Conference Board’s Leading Economic Indicators (LEI) have been flashing a softening economy for quite some time.
Inflation
The CPI continues to be stuck above the Fed’s 2% goal.14 15 But rents are continuing to fall.4 (Note: BLS uses rents that are lagged nearly a year in its CPI calculations.) Thus our view that the CPI will be tame beginning this quarter. According to Apartment List, rents fell -0.6% in December and are now down for five months in a row.16
Not only that, there is a bulge of new rental units coming on line as we have pointed out in prior blogs. There is already evidence of this in the vacancy rates which have spiked.4
This leads us to the conclusion that the fall in rents is not yet over. This continues to be good news for inflation as rents represent 35% of the CPI calculation.
The Labor Market
We also see softening in the labor market. Hiring rates have fallen dramatically, layoffs are on the rise, and voluntary quits are down.12 All of these indicate a softening labor market despite the official U3 Unemployment Rate (a lagging indicator) sitting at 4.1%.
Final Thoughts
Equity markets remain buoyant despite the uncertainty over economic policy that have recently plagued the fixed income markets.1 10-Year Treasury Note yields have spiked about 100 basis points since mid-September.7 We expect yields to retreat as Trump’s policies unfold over the next 90 days.
The Fed may well be on hold at its upcoming January conclave (January 28 & 29) as Trump policy uncertainty won’t yet be resolved.11 This despite the weakness emerging in Industrial Production, in housing and construction, and in the Leading Economic Indicators.6 Our view is that lowering the Fed Funds rate would be appropriate – but we aren’t voting FOMC members.
Given the fall in rents since mid-2024 and rising vacancy rates, rent inflation has all but disappeared.4 In addition, the strong labor market has loosened dramatically as layoffs have risen and the hiring rate has now fallen below pre-pandemic levels.
(Joshua Barone and Eugene Hoover contributed to this blog)