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Kick off 2025 with quality [PODCAST]
Kick off 2025 with quality [PODCAST]
What is quality investing and how does it affect client portfolios?
What is quality investing and how does it affect client portfolios?
01/28/2025
FEBRUARY 2025 MARKET UPDATE
A strong but volatile start
02/07/2025
Key points
Market
Investors may want to consider rotating from cash to Treasuries and/or corporate bonds.
Thrivent Asset Management contributors to this report: John Groton, Jr., CFA, director of administration and materials & energy research; Matthew Finn, CFA, head of equity mutual funds; and John Liegl, CFA, investment product manager
Key points
Inflation relaxes
Inflation measures declined slightly, inching closer to the Fed’s target.
Market strength
All but one equity sector showed gains in January, and Treasury notes stayed steady.
January’s benchmark returns
What mattered in January
The economy: The economic data released over the month was broadly supportive for sustained economic growth. Bank earnings reports were generally strong, monthly job creation remained solid again in January and fourth-quarter gross domestic product (GDP) resulted in 2024 growth reaching 2.8%—an impressive result for an economy that was widely assumed to dip into a recession last year. Retail sales were again robust, and credit card debt fell, but slipping consumer confidence and a falling savings rate signaled caution.
Inflation data was in line with expectations but was nevertheless a source of relief as the Core Consumer Price Index (CPI), which excludes the more volatile food and energy sectors, showed its first deceleration in months and the Core Personal Consumption Expenditures (PCE) Price Index held steady.
The U.S. Federal Reserve (Fed) concluded its January meeting without an interest rate cut (as expected) but issued a somewhat more cautious statement, noting that inflation “remained elevated.” Markets generally took this as a signal the Fed was tilting toward a more cautious approach on inflation and would hold its target rate steady in the near term.
Stocks: The S&P 500® Index set another new high in January, then struggled with a particularly volatile technology sector, before ending the month up 2.70%, more than offsetting its 2.50% drop in December. The strength was broad based, with all sectors but information technology (IT) generating a positive return and with value stocks outperforming growth stocks. The Russell 2000 Index®, consisting of small-cap stocks, rose 2.58%, just shy of the S&P 500 Index, while the technology-heavy NASDAQ Composite Index® underperformed its broad-based index peers, rising 1.64% over the month.
Bonds: Longer-dated Treasury yields initially rose on December’s strong employment report and on uncertainty around the incoming administration’s fiscal and trade policies, but found support after the more supportive inflation data. Corporate bond markets had a good month, with yields compressing relative to their U.S. Treasury counterparts, helping the Bloomberg U.S. Aggregate Bond Index end the month up 0.53%.
How it changes our outlook:
The economy: We continue to believe the U.S. economy can continue to generate robust growth even if interest remains on hold for the time being. However, the strength of the consumer remains a key variable, and despite a generally positive employment environment, there are increasing signs of weakness.
While political news has dominated headlines, our base case remains that the U.S. economy is sufficiently robust and diversified to withstand political and economic uncertainty. With time, and a little help from the Fed (if needed), we believe it can adapt to even dramatic policy changes.
- We remain positive on growth, with waning consumer confidence and uncertainty over policies such as tariffs key risks
Stocks: We maintain a modest overweight to equities over fixed income given our broadly positive outlook for the economy and our bias toward prioritizing economic fundamentals as the primary determinate of investment returns over the long term. But we caution that shorter-term volatility is likely to persist. This may be influenced by concern about large-cap valuations, volatility in economic data because of turning points in the economy or domestic politics, geopolitics or all of the above.
- Stay moderately overweight stocks versus bonds
- Continue to favor large- and mid-cap stocks
Bonds: We continue to expect Treasury yields to likely remain in a range around current levels, though volatile within that range. As such, we maintain our more neutral strategic stance, focused on shorter-term Treasury maturities and investment-grade corporate bonds.
- In bonds, overweight the short end of the Treasury curve, market weight longer Treasuries as a hedge against risk off events and maintain credit exposure
January’s key economic data
U.S. GDP rose 2.3% in the fourth quarter of 2024. The rate was below the prior two quarters and below consensus expectations for a 2.6% rise, but put total growth for 2024 at 2.8%. This was just below the 2.9% growth rate in 2023 and above the 2.5% growth rate in 2022.
The consumer: Still resilient
Consumer debt fell in November, according to the latest figures from the Fed released in early January, with revolving credit (such as credit card debt) falling the most since 2021. However, consumer confidence (as measured by The Conference Board) plunged late in the month as sentiment soured, with fewer households optimistic about business conditions, and more indicating that jobs were hard to find. Nevertheless, retail sales in December rose 0.4% from November, and 3.9% from December 2023. However, a drop in the savings rate from 4.1% to 3.8% in December, lingering near its lows over the last 20 years, raised questions about the sustainability of spending growth.
Employment: Jobs data still solid
January’s employment report showed 143,000 new jobs were created during the month. This was below consensus expectations for 175,000 new jobs. Importantly, the prior two months’ jobs numbers were revised up by 100,000. Average hourly earnings rose 4.1% from the prior year, which was higher than expected. The national unemployment rate fell slightly by 0.1% to 4.0% while the labor force participation rate ticked up to 62.6%. Overall, the employment data show a continued solid labor market, which most likely will keep the Fed on hold from any interest rate moves in the near term.
Inflation: Signs of moderation
The CPI rose less than expected in December, while the Core CPI rose only 0.2% from November—a welcome drop from the persistent 0.3% month-on-month change reported for the prior four months. Core PCE, the Fed’s preferred inflation measure, also rose 0.2% from November to December 2024, inching closer to the Fed’s target.
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How key markets responded
U.S. stocks saw broad strength
The benchmark S&P 500 Index of large-cap stocks rose 2.70% (2.78% including dividends) in January, with all sectors but IT posting gains. The IT sector tumbled near the end of the month after a Chinese artificial intelligence (AI) company raised doubts about U.S. AI companies’ ability to deliver cost-effective performance. The market value of Nvidia Corporation, the leading provider of computer chips that power AI, plunged nearly $600 billion, the largest single-day drop for a company in the history of the U.S. stock market.
The benchmark Russell 2000 Index of small-cap stocks rose 2.58%, just shy of the S&P 500 Index, while the technology-heavy NASDAQ Composite Index underperformed, rising 1.64% over the month.
The table below shows the past month performance results of the 11 sectors:
International equities: Outperforming the U.S.
The MSCI ACWI ex-USA Index, which tracks stocks across developed and emerging-market economies across the world (excluding the U.S.) rose 3.95% in January, outperforming broad-based U.S. indices. Gains were driven by Europe ex-U.K., which rose 7.1% on the back of signs of improving economic growth in the region and steady interest rate cuts from the European Central Bank. Japanese equities were relatively weak, rising just 0.1% over the month as a rising yen weighed on exports.
Treasury bonds: Volatile, but relatively unchanged
The yield on the benchmark 10-year U.S. Treasury note fell 0.02%, to 4.55% at the end of January from 4.57% at the end of December. But mid-month, the 10-year yield reached 4.6%—almost 1% higher than when the Fed started cutting interest rates after December’s strong employment report and uncertainty around the incoming administration’s fiscal and trade policies raised concerns. But encouraging inflation data helped restore some confidence that inflation could continue to ease toward the Fed’s target level.
The Fed left interest rates unchanged at its January meeting, as expected, and tempered expectations for rate cuts in the foreseeable future. Notably, the official statement after the meeting changed from earlier statements of “has made progress toward” the Fed’s target to “remains somewhat elevated.” Markets generally took this to mean that future cuts would be more dependent on inflation’s deceleration.
Credit markets: Robust performance
Investment grade and high-yield corporate bond spreads (the yield paid over comparable U.S. Treasuries) tightened in January, helping to boost the returns of diversified bond indices such as the Bloomberg U.S. Aggregate Bond Index, which ended the month up 0.53%. Robust economic growth combined with softer-than-expected inflation data was supportive for corporate bonds insofar as growth bodes well for revenues while lower inflation could lead to lower borrowing costs should interest rates fall.
The U.S. dollar: Weaker relative to major currencies
The U.S. dollar weakened in January, with the Trade-Weighted U.S. Dollar Index falling 1.39%. The decline was predominately driven by a stronger Japanese yen that strengthened on the back of higher expected interest rates in Japan, though the relative strength of both the euro and British pound also contributed to the decline.
Commodities: Stronger, but volatile
The S&P GSCI Index (a broad-based and production-weighted index representing the global commodity market) rose 2.23% in January. The index was pushed higher by the price of gold and other metal prices on uncertainty about the impact of U.S. trade tariffs. Oil prices were higher, with a barrel of West Texas Intermediate (a grade of crude oil used as a benchmark in oil pricing) rising 1.13% over the month, largely driven by colder weather and concern about higher tariffs.
Media contact: Callie Briese, 612-844-7340; callie.briese@thrivent.com
All information and representations herein are as of 02/07/2025, unless otherwise noted.
The views expressed are as of the date given, may change as market or other conditions change, and may differ from views expressed by other Thrivent Asset Management, LLC associates. Actual investment decisions made by Thrivent Asset Management, LLC will not necessarily reflect the views expressed. This information should not be considered investment advice or a recommendation of any particular security, strategy or product. Investment decisions should always be made based on an investor's specific financial needs, objectives, goals, time horizon, and risk tolerance.
This article refers to specific securities which Thrivent Mutual Funds may own. A complete listing of the holdings for each of the Thrivent Mutual Funds is available on thriventfunds.com.
The S&P 500® Index is a market-cap weighted index that represents the average performance of a group of 500 large-capitalization stocks.
The Russell 2000® Index is an unmanaged index considered representative of small-cap stocks.
NASDAQ – National Association of Securities Dealers Automated Quotations – is an electronic stock exchange with more than 3,300 company listings.
The MSCI ACWI ex-USA Index is an unmanaged index considered representative of large- and mid-cap stocks across developed and emerging markets, excluding the U.S.
The Bloomberg U.S. Aggregate Bond Index is an unmanaged index considered representative of the U.S. investment-grade, fixed-rate bond market.
The Federal Funds effective rate is the interest rate at which depository institutions (mainly banks) lend reserve balances to other depository institutions overnight on an uncollateralized basis. In simpler terms, it's the rate banks charge each other for short-term loans to meet their reserve requirements.
The Consumer Price Index measures the monthly change in prices paid by U.S. consumers for a basket of goods and services.
The Core Consumer Price Index (CPI) measures changes in the prices of goods and services, with the exclusion of food and energy.
The Personal Consumption Expenditures (PCE) Price Index, also known as consumer spending, is a measure of the spending on goods and services by people of the U.S.
The Core Personal Consumption Expenditures (PCE) Price Index, also known as consumer spending, is a measure of the spending on goods and services, excluding food and energy prices, by people of the U.S.
The Nominal Trade-weighted U.S. Dollar Index measures the value of the U.S. dollar based on its competitiveness versus trading partners.
The S&P GSCI measures the performance of the commodities market.
Any indexes shown are unmanaged and do not reflect the typical costs of investing. Investors cannot invest directly in an index.
Past performance is not necessarily indicative of future results.
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