As we continue to meander through the beginning of 2025, part of today’s post will cover a couple additional data points that seemingly contributed to the lack of visibility so far. More importantly, we’ll then turn our attention to the most recent data from last week, which we think begins to provide some clarity that contradicts the early year ups and downs.
First, let’s discuss the jobs report from Jan. 10 that was “stronger than expected” and led to a surge in the 10-year Treasury yield, which peaked at 4.79% that Friday. As you can see in the chart below, since then 10-year yield has cooled from that peak:
This jobs report claims the economy added 256,000 jobs versus expectations of only 155,000. This isn’t the first time equity markets have reacted violently to stronger-than-forecasted headline jobs data. But we believe this initial response was a premature overreaction when taking into account recent history.
As recent history advises us, previous jobs data has been repeatedly revised lower in subsequent months:
Let’s also not forget August 2024. That’s when The Bureau of Labor Statistics dropped the bombshell that there were an additional 818,000 fewer jobs than previously estimated for the year.
That stunning downward revision was one of the catalysts for the Federal Reserve’s half-point rate cut last September. This is important to note because the popular narrative a week ago was that the Fed’s rate cutting pace was being called into question due to economic data like the jobs report being better than forecast.
But to us, the issue with this narrative is that other data continues to suggest the Fed is on track. For instance, continuing jobless claims, which are seen as a proxy for the number of people receiving unemployment benefits, rose to 1.87 million in the week ending Dec. 28. This is an increase over the previous period of about 33,000.
The trend in jobless claims gradually rose throughout last year. This isn’t indicative of an overheating jobs market:
An additional data-based example that runs counter to the “hot” December numbers is the ADP employment change for December. It showed U.S. private businesses added 122,000 workers to their payrolls, which is the lowest in four months and below forecasts of 140,000:
This data matters because the sharp pullback in stocks is directly correlated to the spike in bond yields. Keep in mind, the 10-year yield basically bottomed out at 4.126% on Dec. 6, which is also right around when the stock market last peaked.
The “reasoning” for the selloff in bonds is the thought that the economy is too strong and will result in a lower projection of 2025 Fed rate cuts. Admittedly, there would be a significant equity risk if yields reached the 5% mark, which would be even higher than the highs of 2023:
A move in Treasury yields to 5% would significantly increase the risk that the S&P 500* could break down. It could even breach its 200-day moving average of 5,572, which is an important technical support level.
As mentioned, we think the yield move more than a week ago was an overreaction. Thankfully, the latter half of last week provided relief.
What data provided the support to unwind some of this unnecessary emotional stress?
Well, first let's address the underlying perspectives that muddled near-term visibility for the first two weeks of the year:
- Policy uncertainty from the incoming administration,
- This uncertainty impacts the Fed’s forecast policy, and
- Even inflation surveys seem to be polluted by politics rather than actual data:
The chart above reflects how feelings are currently running contrary to actual data, which is something we are aware of constantly.
Last Tuesday brought some inflation relief as the producer price index came in lower than expected at 0.2% versus an estimated 0.4% month-over-month. That was followed up the next day with cooler consumer price index data. The expectation of the estimate for month-over-month core CPI, which excludes energy and food prices, was 0.24%:
The actual month-over-month CPI reading came in even cooler at 0.2%. This meant core CPI was 3.2% year-over-year, which was 0.1% less than expected:
These better-than-expected inflation ratings created an immediate positive catalyst reflected in equity markets. It’s a great example of actual data beginning to clear the fog for equity markets.
Of course, this is just one week. But is there additional market data to support this being an inflection point so far? We think so – it’s in the form of stocks washing out.
We can see this by unpacking money flows via trusty “big money” data from our friends at MAPsignals. When looking underneath the surface, it’s clear that a wave of selling has driven many stocks to oversold levels, potentially culminating in a washout.
For instance, on Jan. 10 – the same day investors overreacted to the jobs report – stocks were sold hard:
This led MAPsignals’ trusty Big Money Index (BMI), a 25-day moving average of “big money” investor buys and sells, to fall. The BMI hit 36.7%, a level not seen since November:
This lets us know more stocks are being sold than bought. We’re sure that’s led many people to be uncomfortable with their portfolios lately. But understanding there was a healthy washout two Fridays ago, we can look to recent history to provide some guidance and context going forward.
Looking back 10 years, we've seen 276 days with a sub-37% BMI. Over that period, what’s in store for the S&P 500 and the S&P MidCap 400#? Well, good fortune tends to come to those who can endure rough patches, especially over time:
At this point it appears the year’s first actual economic data immediately provided some much-needed clarity for investors. That’s especially useful as we enter the beginning of earnings season, which we expect to be one of the best in recent history.
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* The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market.
#The S&P MidCap 400 tracks 400 companies that broadly represent companies with midrange market capitalization.
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