Welcome to the February 2025 Newsletter. This month, we’re discussing the economy, employment, financial terminology, and more.
Summary
Let’s review what Austan Goolsbee, Chicago Federal Reserve Bank President, said on January 31 after the PCE inflation numbers were released.
“I’m liking the December PCE inflation numbers. It was expected, and it was even a little better than expected. I don’t pay a lot of attention to any one month’s numbers, but I have comfort that we are on our way to 2% inflation.”
“You know I’ve been saying we are on a path to 2% for a while now. Here are my comments on the three major components of inflation.
- We are seeing progress on housing inflation.
- We have service inflation coming back down to where it was pre-COVID.
- Goods inflation has been a little stubborn.
But overall, on net, we are going the right way.”
“I am skeptical of just looking at the 12-month PCE inflation number when we know the first quarter of 2024 had a big bump up in inflation. If inflation numbers continue to be lower as we expect in 2025, the lower numbers of first quarter 2025 will replace the higher inflation number of first quarter 2024. If so, the 12-month inflation by April will show a plunging inflation number from the current level.”
“Also, the job market looks like we are at full employment. The underlying parts of the economy, inflation and unemployment, look like it is on an excellent path.”
Quote of the Day
Spoken By Marty Raney on the Discovery TV show, Homestead Rescue.
Reasonable words regarding risk,
“A turtle goes no-where unless he sticks his neck out.”
Pop Quiz
Last month we asked about the four periods of the Industrial Revolution. The question this month is what was the period of time called before the first Industrial Revolution and what were any inventions or discoveries made during that time?
The answer to this month’s Pop Quiz is at the bottom of the newsletter.
The Economy
Employment
Total U.S. nonfarm payroll employment rose significantly by 256,000. The official unemployment rate, U-3, decreased to 4.1%. The October and November 2024 combined employment numbers were revised lower by 8,000 than previously reported.
Chart 1 is based on the Bureau of Labor Statistics official unemployment rate, U-3.
Chart 2 shows the two-year trend of employment growth.
The Job Openings & Labor Turnover Survey (JOLTS) increased to 8.1 million open jobs across the country as of the last business day in November. It was 7.7 million in the prior month. Even though the October and November JOLTS data showed an increase in open jobs, the 10-year chart below shows the downward trend continues in open jobs since March 2022.
The seasonally adjusted Total U.S. Unemployment Rate, U-6, decreased to 7.5% in December compared to the three prior months which were 7.7%. There were 6.5 million people unemployed in December, age 16 and older. Last month it was 6.7 million people unemployed.
December Unemployment Rates by Education Level
Average hourly earnings of all employees on private nonfarm payrolls were up 3.9% in December compared to a year ago. It was 4% the previous month.
| Less Than High School Diploma | 5.6% |
| High School Graduate, No College | 4.3% |
| Some College, Associate's Degree, or Skilled Trade Degree | 3.5% |
| Bachelor's Degree or Higher | 2.4% |
Leading Economic Indicators (LEI) sponsored by The Conference Board
The LEI decreased slightly 0.1% in December. The Conference Board’s spokesperson said, “Low consumer confidence, relatively weak manufacturing orders, an increase in initial unemployment claims, and a decline in building permits contributed to the decline.”
Gross Domestic Product (GDP)
The Bureau of Economic Analysis said the advance estimate for GDP in the fourth quarter of 2024 rose at an annual real rate of 2.3%. GDP for the third quarter 2024 was 3.1%.
The increase in the fourth quarter GDP reflected an increase in consumer spending and government spending. For the year 2024, GDP increased 2.5% and grew 3.2% in 2003.
Labor Productivity – Quarterly
The preliminary report of fourth quarter productivity will be released on Feb 6.
As per the December revision, annualized and seasonally adjusted nonfarm business labor productivity did not change and remained at a 2.2% increase during the third quarter of 2024 as reported by the Bureau of Labor Statistics. In the third quarter a year ago, the increase was 2.0%.
Inflation
Annual inflation increased to 2.6% as measured by the Personal Consumption Expenditures (PCE) index for December. It was 2.4% in the 12-months ending in November. Core PCE index, which excludes food and energy, remained the same at 2.8% in December as in November and October.
University of Michigan Consumer Sentiment
Consumer sentiment in January decreased to 71.1, as compared to December’s 74.0. See the 10-year chart below.
Consumer sentiment fell for the first time in six months. Sentiment declines were broad based and seen across income, wealth, and age groups.
Mortgage Rates and Average Existing Home Prices
As of January 31, 2024, the average 30-year fixed-rate mortgage had an interest rate of 7.05%, compared to 7.07% last month. The average 15-year fixed-rate mortgage had an interest rate of 6.47%, compared to 6.48% last month.
The median existing-home sale price decreased slightly in December to $404,400. But that is a 6.0% increase compared to December 2023 according to the National Association of Realtors. The inventory of existing homes for sale dropped to a 3.3-month supply in December. The desired supply-target is 6 months.
The U.S. Public Debt as Issued by the Treasury Department as of December 31, 2024, was:
$36,421,000,000,000.
Last month it was $36,288,000,000,000.
Important Dates in February
THE STOCK MARKET
Commentary
Ray Dalio is an American investor, author, and hedge fund manager. He has served as co-chief investment officer of the largest hedge fund in the world, Bridgewater Associates since 1985. On January 21, 2025, Dalio spoke to CNBC at the World Economic Forum in Davos, Switzerland.
Dalio said, “There are five major forces in the world today that I am looking at.
- There is a “debt money” force pushing interest rates and government spending around. U.S. Treasury bonds pay for our huge national debt. As the supply of Treasury bonds must increase to pay for the interest on our debt, how do you get people who buy Treasury bonds to buy more? Answer: by having existing bond prices drop which causes the bond yields on both existing bonds and new bonds, to increase. That is what bond buyers want – a higher interest rate on newly purchased bonds.
- There is a war going on internally in the U.S. and many other countries. This is a war between the left and the right.
- There are two geopolitical wars going on – in Israel and Ukraine.
- There are massive acts of nature taking place – droughts, floods, storms, pandemics.
- We are seeing massive changes in technology.
See additional comments in the section below Recommended Action for Your Stock Portfolio.
Stock Market Valuation
OK, just how bad was the stock market downturn in December and early January? Using the S&P 500 Index, the market high was 6,090.27 on December 6. The low was January 10 at 5,827.04. That represents a drop of 4.3%. Hopefully no one overreacted to what Mark calls, “normal market noise”.
So, expanding a bit on market volatility, how do most investors label the various degrees of market downturns:
- Crash: More than -40% down
- Bear Market: More than -20% down
- Correction: More than -10%
- Consolidation: More than -5% down
- Noise: Less than -5% down
Mark’s Australian friend would say during a 4% stock market downturn like we just had, “Don’t worry mate, she’ll be right.”
What do the large brokerage houses project for the S&P 500 Index by the end of 2025?
The S&P 500 Index closed on January 31, 2025 at 6,040.53.
Prior Annual S&P 500 Performance As Per The Exchange Traded Fund, VOO
2024: +24.98%
2023: +26.32%
2022: -18.19%
2021: +28.78%
Recommended Action for Your Stock Portfolio
So, what are the tailwinds pushing and pulling on the stock market in early 2025?
Stock Market Positives:
- Corporate earnings are strong with an expected growth rate of 14% compared to 2024.
- Corporate profit margins are near record-high levels of 12%.
- The magnificent seven (Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla) are expected to do OK in 2025.
- The other 493 stocks in the S&P 500 Index should have broad earnings increases and at least respectable stock market performance in 2025.
Stock Market Negatives and the Unknowns:
- The stock market, especially the Magnificent Seven, currently have high valuations.
- We are likely in an era of higher for longer interest rates.
- We have uncertain fiscal policy (controlled by Congress and the President) and uncertain monetary policy (controlled by the Federal Reserve).
- We do not yet know all the details that will be coming from the President on federal spending, taxation, immigration, Israel / Ukraine wars, federal employee layoffs, and regulations.
So, which sectors of the S&P 500 will likely be the earnings leaders in 2025? Here are our thoughts in alphabetical order.
Most Positive: Communication Services, Consumer Discretionary, Financials, Health Care, Industrials, Materials, and Technology.
Positive: Consumer Staples, Energy, and Utilities.
Least Positive: Real Estate
• Not FDIC Insured • No Bank Guarantee • May Lose Value
Financial Markets Vocabulary
Alpha is a financial metric used to describe the performance of an individual stock, a particular strategy (such as a large cap value), or an investment manager’s overall portfolio performance as compared to the performance of an appropriate market index such as the S&P 500 Index.
If used to describe a manager’s performance, a statement might be, “Betty Smith had an alpha of 1% last year” which means if the S&P 500 was up 10% last year, Betty’s portfolio was up 11%. This assumes that Betty uses the S&P 500 as her index with which to compare her portfolio’s performance.
Beta is a financial metric that shows an investment's sensitivity to market volatility. A beta greater than 1 indicates the investment is more volatile than the market as a whole. For example, a beta of 2 indicates the investment moves up and down twice as much as the market moves.
A beta less than 1 indicates the investment is less volatile than the market.
OK, Now What Do I Do?
Let’s take a look at the worldwide automobile industry. It has been quietly consolidating the past few years. In order, here is a list of the top seven largest manufacturers in the world and the brands they manufacture and/or have a major ownership.
- Toyota & Lexus, Subaru and Mazda.
- Volkswagen & Audi, Porsche, Bentley, Lamborghini, Bugatti, Ducati, Skoda, Seat, Scania, and Man.
- Honda & Acura, Nissan, Infiniti, and Mitsubishi.
- Hyundai & Kia.
- Stellantis & Chrysler, Dodge, Ram, Jeep, Alfa Romeo, Citroen, Fiat, Lancia, Maserati, Opel, and Peugeot.
- General Motors & Chevrolet, Chevy Trucks, Buick, Cadillac, and GMC.
- Ford & Lincoln and Ford Trucks.
Automobile and aircraft manufacturing are very capital-intensive enterprises (it takes a lot of money to be in these businesses). For this reason, Mark does not recommend buying the stock of any company in these two industries.
• Not insured by any bank or government • Subject to risk & possible loss of principal
Our Financial Bad Boy This Month
Capital One Sued by CFPB Over Its Savings Accounts
The Wall Street Journal, January 15, 2024, Page B10
The Consumer Financial Protection Bureau (CFPB) is suing Capital One alleging the bank misled some of its customers by not paying them the rate it advertises on its primary savings account.
The lawsuit relates to a change Capital One made in the era of low interest rates. In 2019, the lender introduced a savings account call 360 Performance Savings. Existing customers were kept in older accounts with a similar name, 360 Savings, which was no longer available for new customers.
When the Federal Reserve started its rate increases, Capital One only raised rates on the 360 Performance Savings accounts. Those accounts today pay a rate of 3.8%. The older accounts pay 0.5%.
“Capital One did not specifically notify 360 Savings accountholders about the new product but instead worked to keep them in the dark about those better paying accounts”, according to the CFPB statement.
Capital One said in their statement it strongly disagreed with the agency’s claims and that it would defend itself in court.
The Bond Market
Commentary
J. Powell, chairman of the Federal Reserve said at his January 29 news conference, “The public should be confident that we will continue to do our work as we always have, focusing on using our tools to achieve our goals and really keeping our heads down and doing our work.”
“Recent indicators suggest economic activity has continued to expand at a solid pace. The unemployment rate has stabilized in recent months at a low level, and labor market conditions remain solid. Inflation remains somewhat elevated.”
Recommended Action for Your Safest Money
Our recommendations for an investor’s safest money have not changed from last month.
Our recommendations, in no particular order, are:
- Short-term U.S. Investment-Grade Corporate or Securitized bond funds.
- Short-term high-yield bond funds.
- U.S. Savings I-Bonds which have a max contribution of $10,000 per account per year.
Due to the relatively low return of these investment products, investors should not put 100% or anything close to that in these products. These products are only for an investor’s safest money or perhaps 5% to 25% of an investor’s total portfolio. These products are credit safe, but they will not provide the growth or income needed to stay ahead of, or even keep up with, taxes and inflation.
Past performance is not a guarantee of future results.
Pop Quiz Answer
What was the period of time called before the first Industrial Revolution and what were any inventions or discoveries made during that time?
Answer:
The Renaissance!
The Renaissance brought significant changes to art, religion, printing, politics, exploration, and science. The Renaissance, roughly 1450 to 1650, ushered the human race out of the Dark Ages and successfully led us towards the First Industrial Revolution that began around 1760.
The Renaissance began some 100 years after the end of the Bubonic Plague (1347 to 1351) and began at the end of the Hundreds Years’ War (1337 to 1453) between France and England.
Here are some of the best inventions, discoveries, and art created during the Renaissance.
- 1439 – Johannes Gutenberg, born in Germany, created the first moveable type printing press in Strasbourg, France.
- 1492 – Christopher Columbus sailed the ocean blue and discovered the island of Hispaniola (now Dominican Republic and Haiti).
- 1495 to 1498 – Leonardo da Vinci painted the Last Supper. In 1500 he painted Salvator Mundi (Savior of the World).
- 1501 to 1504 – Michelangelo carved the statue of David. Then from 1509 to 1512, he painted the Sistine Chapel ceiling.
- 1503 – Leonardo painted the Mona Lisa.
- October 31, 1517 – Martin Luther began the Protestant Reformation of the Catholic Church with his 95 Theses nailed to the Castle Church door in Wittenberg, Germany.
- 1519 to 1522 – Ferdinand Magellan with 5 ships and a crew of 270 circumnavigated the world but only 18 men and one ship made it back to Spain three years later.
- 1521 – Niccolo Machiavelli, a Florentine author, published The Art of War. His other books were published in 1531 and 1532 after his death. He is considered the father of modern political theory.
- 1543 – Nicolaus Copernicus, of Poland, described the solar system with the sun at its center, not the earth, in his book, On the Revolutions of the Celestial Spheres.
- 1590 – The microscope was invented by Zacharias Janssen.
- 1601 to 1605 – Johannes Kepler defined three laws of planetary motion.
- 1608 – The telescope was first used for surveying and military applications. But in 1609 Galileo Galilei used an improved version to study the planets.
- 1666 – Isaac Newton discovered the concept of gravity and wrote three laws defining its properties.
- Then the first industrial revolution began around 1760.