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Week in Review
Equity Markets:
The markets ended the week on a negative note following the disappointing reading from the University of Michigan Consumer Sentiment Index. The S&P 500 fell 1.71% and the Dow had its worst day so far this year, falling more than 700 points closing down 1.69%. Prior to the sell-off to close the week the markets were nearly flat as investors digested corporate earnings and various economic reports. Investors fled economically sensitive areas of the market. The Russell 1000 Growth Index fell 2.76% while its value counterpart only finished the week down 0.96%1. The Russell 2000 Index, which represents small capitalization companies, fell drastically by 3.69% for the week.
Earnings remain strong despite modest misses last week. So far, 85% of S&P 500 companies have reported earnings. 75.8% exceeded earnings expectations, a slight tick down from the week prior, and 63.8% have beaten revenue expectations2.
Fixed Income Markets:
The bond market remained relatively stable for the second consecutive week. The 10-year treasury yield finished the week at 4.42%, a mere 0.05% lower than the week prior. The 2-year yield fell 0.07% and closed at 4.19%.
The meeting minutes from the Federal Reserves’ most recent policy meeting were released last week. A common theme continued in the policy minutes, concerns about current political policy on inflation. The FOMC members noted they feel the current policy rate, 4.25-4.50%, is sufficient until further progress is made on the inflation front.
Economic:
Home builders’ confidence fell drastically this month as concerns on tariffs, higher rights and inflation rose. The NAHB Housing Market Index fell five points to 42 this month. The leading economic index fell 0.3% in January following marginal gains in the previous two months. The “future conditions” portion of the index turned more pessimistic and was a major factor in the negative reading. The biggest surprise last week was the significant decline in the University of Michigan Consumer Sentiment Index. The index fell 10%, more than double the preliminary reading from just a couple of weeks ago. Consumers are concerned about how potential tariffs could keep inflation elevated. Inflation expectations for the next year spiked to 4.3% and the 5-year expected inflation rose to 3.5%. This is the highest expected long-term inflation reading since 19953. An often overlooked report, S&P Global’ s Flash PMI, came in soft. This report provides more real-time insight into an economy’s economic condition. The most recent report showed that the services sector of the economy unexpectedly fell into contraction due to uncertainty and disruptions from political policy.
Looking Ahead
Equity Markets:
We noted in last week’s piece the year-to-date rotation into more “value” oriented companies. We believe maintaining a diversified portfolio that allows you to capture these shifts should be the foundation of your portfolio construction and asset allocation strategy. These style shifts also include geography. Very quietly, markets outside of the United States have significantly outperformed following multiple years of underperformance. The MSCI EAFE Index, which represents developed international, is up 8.2% so far in 2025 and the MSCI EM Index, which represents emerging markets, is up 6.9%1. We believe this trend could continue if economic concerns remain top-of-mind domestically.
Admittedly, we don’t know, and believe nobody knows, when a “value vs growth” or “domestic vs foreign” rotation will occur. This is why establishing strategic allocations is paramount to long-term investing success. These rotations can live concentrated investors in the wind and potentially overexposed to a subset of risks that may not be lie in other areas of the market. A thoughtfully developed strategic allocation not only allows investors to capture these shifts but also to establish a desired level of risk. Market sell-offs not only impact account balances but the emotional impact could be detrimental to achieving your long-term investing goals if the risk your current portfolio bears exceeds the established level of desired risk.
Fixed Income Market
The 4.5% level on the 10-year Treasury yield was an important level for us. Now that we have moved off of that level, we believe the bond market should stay range bound in the 4.25-4.5% range in the near term. Despite the resurgence of inflation concerns we believe policymakers have navigated the battle against inflation well. Inflationary risks remain but we the current policy rate is at a level we believe the FOMC will be able to make minor adjustments if the environment warrants action.
Economic:
This week’s economic calendar will be light but will culminate with the PCE report being released Friday. Recent concerns over inflation will likely draw more attention to the Fed’s preferred inflation gauge. The median forecast for the headline reading is an annual increase of 2.4%, and a 2.6% increase for the core reading, which excludes food and energy. Other notable reports include the second estimate for GDP, personal spending, and pending home sales.
Sources:
1)JP Morgan
2) LSEG I/B/E/S
https://lipperalpha.refinitiv.com/wp-content/uploads/2025/02/TRPR_82221_788.pdf
3)Reuters.
https://www.reuters.com/markets/us/us-consumer-sentiment-plunges-february-tariff-worries-2025-02-21/
4)CME Group
https://www.cmegroup.com/markets/interest-rates/cme-fedwatch-tool.html
5)LSEG I/B/E/S
https://lipperalpha.refinitiv.com/wp-content/uploads/2025/02/TRPR_82221_787.pdf
Important Disclosures:
Investment Advisory Services offered through Krilogy®, an SEC Registered Investment Advisor. Please review all prospectuses and Krilogy’s Form ADV 2A carefully prior to investing. This is neither an offer to sell nor a solicitation of an offer to buy the securities described herein. An offering is made only by a prospectus to individuals who meet minimum suitability requirements.
All expressions of opinion are subject to change. This information is distributed for educational purposes only, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, products, or services.
Diversification does not eliminate the risk of market loss. Investments involve risk and unless otherwise stated, are not guaranteed. Investors should understand the risks involved of owning investments, including interest rate risk, credit risk and market risk. Investment risks include loss of principal and fluctuating value. There is no guarantee an investing strategy will be successful. Past performance is not a guarantee of future results. Indices are not available for direct investment; therefore, their performance does not reflect the expenses associated with the management of an actual portfolio. The S&P data is provided by Standard & Poor’s Index Services Group.
Services and products offered through Krilogy® are not insured and may lose value. Be sure to first consult with a qualified financial advisor and/or tax professional before implementing any strategy discussed herein.
