Market Update – February 3rd, 2025

Financial Markets

The market started last week lower amid concerns that China was outpacing U.S. technology, particularly with the rollout of DeepSeek, a competitor to ChatGPT. While markets partially recovered midweek, they fell again on Friday due to tariff concerns, which may continue into this week.

As of Friday, January 31st, the Dow Jones Industrial Average remained slightly positive, up 0.27% for the week. The S&P 500 declined nearly -1%, while the Nasdaq Composite fell around -1.64%. Bonds rose as investors shifted toward risk-off assets, with the Barclays Aggregate Bond Index gaining 0.4% for the week.

Source: Zacks

Market News

January Fed Meeting

The Federal Reserve held interest rates steady at its January meeting, marking the first pause in rate cuts since August 2024. While markets had hoped for clearer guidance on future rate reductions, the Fed provided no signal that cuts are imminent, citing ongoing uncertainty—particularly regarding the potential inflationary impact of newly imposed tariffs.

Headline inflation has edged higher in recent months, reinforcing the Fed’s decision to keep monetary policy slightly restrictive, maintaining rates in the 4.25%–4.50% range. At the same time, President Trump has increased pressure on Fed Chair Jerome Powell to lower rates. Powell, however, has emphasized the Fed’s political independence, especially as inflation remains above the 2% target, making premature rate cuts a potential risk.

Looking ahead, the March FOMC meeting will be particularly important, as the Fed will release its quarterly Summary of Economic Projections (SEP), offering insight into policymakers’ expectations for rates through year-end. By then, additional labor market and inflation data will be available, as well as early signals on how tariffs are affecting economic conditions.

GDP Growth

The initial GDP estimate for the fourth quarter of 2024 showed that real GDP grew at an annualized rate of 2.3%, slightly below expectations. The majority of the growth was driven by consumer spending, with retail sales and personal spending remaining steady throughout the quarter. Government spending also contributed positively to the GDP growth, while trade impacts were minimal. However, investment had a negative effect on growth, subtracting around 1% from real GDP.

Although the 2.3% growth rate was better than many had anticipated heading into 2024, it fell short of the more recent estimates from economists. Additionally, this growth rate marked a decline from the 3.1% pace of real GDP growth seen in the third quarter.

PCE Inflation

December PCE inflation came in line with expectations, with headline prices rising 0.3% for the month and core prices increasing 0.2%. On an annual basis, headline PCE inflation stood at 2.6%, while core PCE inflation was slightly higher at 2.8%. A significant portion of the headline increase was driven by a rise in energy prices. With inflation still above the Federal Reserve’s 2% target, this enabled the Federal Reserve to keep interest rates steady at last week’s meeting.

Personal Income, Spending, & Saving

In addition to the PCE inflation data, the BEA released December figures on personal income, spending, and savings. Total personal income and after-tax disposable personal income both increased by 0.4% for the month. Meanwhile, personal outlays, a proxy for consumer spending, rose 0.6%, a relatively strong figure for the holiday season. With spending outpacing income growth, the personal savings rate declined to 3.8%, falling below the 4% mark in December.

Consumer Confidence

U.S. consumer confidence declined around 5% in January, as optimism about both present and future economic conditions weakened. The decline was driven primarily by consumers under 55 years old and households earning over $125K. Despite this drop, consumer confidence has remained relatively stable within a narrow range since 2022. The key concern moving forward is whether the index breaks below this range in 2025, which could signal a more bearish economic outlook.

Summary

Markets declined last week amid concerns over China’s technological advancements and renewed tariff tensions. The Federal Reserve held rates steady in its January meeting, citing inflation risks, while GDP growth for Q4 came in at 2.3%, slightly below expectations. Consumer confidence weakened in January, and personal spending outpaced income growth, leading to a decline in the personal savings rate.

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Joseph M. Maas,
CFA, CFP®, ChFC, CLU®, MSFS, CCIM, CVA, ABAR, CM&AA

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