Below are the economic and market highlights for the week:
- The Federal Reserve tapped the brakes on more interest rate cuts, holding its benchmark interest rate target range at 4.25% to 4.50%. This week’s FOMC meeting was the first time the central bank refrained from cutting rates since beginning its interest rate cutting cycle in September. The Fed cited a healthy jobs market and inflation remaining above its 2.00% target level as reasons for holding rates steady. In post-FOMC comments, Fed Chair Jerome Powell largely stuck to script, noting the central bank remains data dependent and is in no rush to further lower rates.
- Headline U.S. GDP slowed as 2024 drew to a close despite a burst in consumer spending in the holiday quarter. Q4 GDP rose 2.30%, down from Q3’s 3.10% print. The decline in the headline figure was mainly driven by slower production of inventories, or unsold goods, a typically volatile category that subtracts from GDP. While growth contracted nearly a full point in Q4 (on an annualized basis), the consumer remained in control and in the shopping spirit. Households boosted their spending by a robust 4.20% for their biggest gain in almost two years.
- Inflation remained persistent in December. The Personal Consumption Expenditures (PCE) Price Index rose 2.60% Y/Y in December while core PCE, which excludes volatile food and energy, grew at a 2.80% clip. December’s headline reading was also 0.20% higher than November’s reading. Despite the increase in prices, spending remained strong, up 0.70% in December. That outstripped personal income which rose 0.40%. With core PCE, the Fed’s preferred inflation measure firmly above 2.00% and strong consumer spending numbers, the Fed’s pause appears likely to remain in place until at least June, which is bad news for borrowers.
Solid Economic and Earnings Data Trump AI’s DeepSeek
It was a strong start to 2025 as U.S. equity markets finished January trading on a high note. The economically sensitive Dow Jones Industrial Average led the charge, powering its way to a 4.70% gain for the month. Strong consumer spending and optimism for tax cuts and deregulation helped lift the index. The S&P 500 and Nasdaq Composite Index also finished higher, up 2.70% and 1.64%, respectively. Gains in the tech heavy indices however were cut short earlier in the week by breaking news from a “Made in China” AI startup, DeepSeek. The Chinese startup was reported to have produced a competitive AI model for a fraction of the cost of rival models from OpenAI, Anthropic, Google, and others. DeepSeek’s R1 model was also reported to have outperformed OpenAI’s ChatGPT in several tests. The lower cost model sparked concerns over the massive spending by U.S. tech giants to maintain their competitive advantage against global rivals and the stretched valuations leading edge semiconductors and other AI infrastructure stocks trade at in what is a very crowded trade. Tech investors were quick to dump chip stocks on the news, with AI darling Nvidia feeling the brunt of the selloff. The shares plunged 17%, shedding almost $600 billion in market cap on Monday, the biggest drop ever for a U.S. company. By Tuesday, however, investors saw the dip as a buying opportunity and chose to focus on solid consumer spending, strong earnings, and balanced tones from the Federal Reserve as reasons for continued optimism.
January trading was certainly dominated by many market moving headlines. However, the economy and a strong earnings season seemed to carry the month. The consumer, long rumored to be struggling amid a tightening labor market and sticky inflation showed no signs of wavering in the fourth quarter, posting their best showing in almost two years. The Q4 2024 earnings season also lent further support to a robust economy. With 149 companies in the S&P 500 having reported earnings as of Jan. 30th, Q4 earnings are expected to rise 11.10% Y/Y. Excluding the energy sector, earnings are expected to increase 14.50% Y/Y. Hard charging market bulls remain optimistic for further gains into 2025 driven by the Trump administration’s moves to take the corporate knife to rein in government spending, lower taxes, and reduce regulation to promote business growth. Although there’s been a flurry of activity in the first two weeks of the administration, it may be more challenging to implement many of the proposed changes. Next month could bring its first big test as it attempts to implement tariffs while maintaining the U.S. economy’s momentum. Businesses have several levers they can pull to cushion the blow from moving manufacturing to other countries and/or raising prices. Although spending has been robust, consumers may opt to take a more cautious spending approach until they get greater clarity into Washington’s policies and how they will impact their wallets.
The Week Ahead
A big week for markets with the first nonfarm payrolls and ISM reports of 2025.
Critical Questions for Your Annual Financial Review
As January wraps up, it’s frequently been dubbed the “longest month ever,” with countless social media memes jokingly asking, “How is it still January?” We are wondering the same thing, and we are ready to flip the page to February. The turning of the calendar is a good reminder to re-visit your financial plan. We recommend meeting with your advisor at least annually to review your plan and answer the following questions:
Are you still on track to achieving your financial goals? Since your goals are based on specific financial milestones, an annual review will help ensure you are on track and making progress. Your advisor can discuss with you any changes in your financial goals that may require updating your plan.
Have there been changes in your income or expenses? A change in your income level, receiving an inheritance, unexpected expenses, or a change in your lifestyle may affect your plan and require adjustments to keep you on track.
Do you have an appropriate level of risk coverage? A review of your plan will help assess risk level and health and life insurance needs, ensure you have sufficient coverage to protect you and your family, and ensure that you aren’t over- or under-insured.
Are your beneficiaries up to date? Since beneficiary designations supersede any instructions in a will, we recommend regularly reviewing your beneficiary designations on your IRA, 401(k), and life insurance policies.
Is your estate plan up to date? An estate plan should be reviewed at a minimum of once every five years, but more often if there are any material changes in circumstance, such as the birth or adoption of a new child, a change in marital status, a change in employment, or a change in your financial goals. Additionally, new legislation can impact both estate planning and tax laws, making it essential to review your plan regularly.
Are there any estate planning or tax law changes that may affect your plan? Many provisions of the Tax Cuts and Jobs Act passed during President Donald Trump’s first term, including lower tax rates and a higher estate tax exemption, are set to expire in 2025 if Congress doesn’t act to extend the bill. A renewal is considered likely, however, even with a Republican congress and president, history shows tax law changes can be unpredictable. For example, the Tax Reform Act of 1986 under the Reagan administration eliminated numerous tax shelters, increased the capital gains tax, and closed corporate tax loopholes. In 1990, President George H.W. Bush signed a tax increase despite his “no new taxes” campaign pledge. The 2001 tax cuts under George W. Bush gradually reduced the estate tax to elimination by 2010. However, due to budget constraints, Republicans allowed the estate tax to return in 2011 which was unexpected.
Tax legislation may be unpredictable, but meeting with your advisor and reviewing your financial plan each year can keep your plan up to date, create stability in a shifting tax landscape, and lay the groundwork for a successful year ahead.