TheMoneyGeek Unplugged

The S&P 500 index closed almost two percent lower after a fairly volatile, shortened trading week as investors grapple with uncertainty regarding future monetary policy and economic conditions. The NASDAQ index shed 2.2% while the small capitalization stocks slid 3.4% on the week, giving up their prior week‘s strength.

The post-election market “bump” we saw has all but been dissipated as institutional distribution (selling) continued this week, raising concerns of a more extended market correction.

Friday’s Employment Situation Summary (AKA the monthly jobs report) from the Bureau of Labor Statistics (BLS) for December surprised forecasts, coming in with 256K new jobs while the unemployment rate ticked down to 4.1%. Employment increases were seen in health care, retail, government, and social assistance. While a positive development, all but retail are non-cyclical sectors that are less sensitive to economic fluctuations. Stocks sold off and interest rates ticked up in response as the report reduces the possibility of additional rate cuts in 2025.

Job Openings from the BLS for November reported an increase to its highest level since May. Despite this, both the hiring and quits rate ticked down, suggesting that employers are hiring cautiously and that workers may feel less confident about finding new job opportunities.

The Institute for Supply Management’s (ISM) Services Sector rose in December, signaling continued expansion. However, a dramatic increase in the Prices Paid subcomponent is concerning, indicating that inflation pressures are becoming more pervasive. Despite improvements in most components, bond yields jumped higher and stocks sold off, proving that good economic news can sometimes elicit a bad market reaction.

A deeper look beneath the surface reveals why the situation may not be as encouraging as it seems. Many survey respondents cited end-of-year seasonal factors that boosted demand (perhaps to front-run potential tariffs.) Indeed, the main focus was tied to concerns about potential tariffs. This implies that the services sector could be weaker in the coming months if new policies are introduced.

Since September, the Federal Reserve has implemented several short-term interest rate cuts in an attempt to support economic growth. However, despite these efforts, longer-term bond yields have actually continued to climb (pressuring bond prices.) This suggests that some investors may be rejecting the idea that inflation has been tamed, which would likely limit the Fed’s ability to reduce rates further in the near term.

Friday’s preliminary January reading of Consumer Sentiment from the University of Michigan saw a fractional decrease from last month. However, the Current Conditions component improved while the Consumer Expectations component fell, reflecting concerns over future economic growth. Inflation uncertainty has climbed considerably over the past twelve months and year-ahead expectations soared in January, its highest reading since May 2024.

Sam H. Fawaz is the President of YDream Financial Services, Inc., a fee-only investment advisory and financial planning firm serving the entire United States. If you would like to review your current investment portfolio or discuss any other tax or financial planning matters, please don’t hesitate to contact us or visit our website at http://www.ydfs.com. We are a fee-only fiduciary financial planning firm that always puts your interests first with no products to sell. If you are not a client, an initial consultation is complimentary, and there is never any pressure or hidden sales pitch. We start with a specific assessment of your personal situation. There is no rush and no cookie-cutter approach. Each client and their financial plan and investment objectives are different.

Source: InvesTech Research