Key Events: Strong jobs report underscores solid economy
The nonfarm payrolls report revealed a healthy increase of 256,000 jobs for December and an unemployment rate that edged back down to 4.1%. This is good news for the labor market and supportive for general economic activity at the start of the year.
While this may be ‘good’ for employment and the economy, it presents challenges for risk assets. Inflation expectations rose from 2.8% to 3.3% for the year ahead according to the preliminary University of Michigan Survey and the expectations for the number of interest rate cuts in 2025 have been reduced.[1]
Market Review: Rising rates exposed vulnerable valuations
Bond markets sold off on strong economic data and rising inflation expectations. As a result, stock multiples declined on higher real rates.
The US dollar continued to strengthen due to the underlying resilience of the US economy. Even though the dollar ended the week on a high note, international equities managed to outperform domestic equities. Perhaps the extreme valuation differences have finally reached a level that discerning investors can no longer ignore.
Outlook: Vigilant of risks; maintaining disciplined approach
Fear of rising inflation expectations continues to weigh on the markets. As shown in the chart below, inflation expectations have risen by more than 1% since last September and have resumed the uptrend at the start of the year following several weeks of consolidation.
Higher inflation expectations have pulled real rates forward as well and that has acted as a depressant for risk asset pricing. These issues are well understood, but a stronger economy should also lead to resilient earnings growth and that should support the theme of market broadening throughout 2025.
Inflation Expectations and Real Rates[2]
This material is intended to be educational in nature,[3] and not as a recommendation of any particular strategy, approach, product or concept for any particular advisor or client. These materials are not intended as any form of substitute for individualized investment advice. The discussion is general in nature, and therefore not intended to recommend or endorse any asset class, security, or technical aspect of any security for the purpose of allowing a reader to use the approach on their own. Before participating in any investment program or making any investment, clients as well as all other readers are encouraged to consult with their own professional advisers, including investment advisers and tax advisors. OneAscent can assist in determining a suitable investment approach for a given individual, which may or may not closely resemble the strategies outlined herein.
[1] Source: Bloomberg Economic Data; University of Michigan Consumer Survey (Preliminary data)
[2] Source: Bloomberg
[3] Source: Source: Market Returns reference the following indices: Large Cap – S&P 500, Mid Cap Growth – Russell Midcap growth, Mid Cap Value – Russell Midcap Value, Small Cap – Russell 2000, Developed – MSCI EAFE, Emerging – MSCI Emerging Markets, Aggregate – Bloomberg US Aggregate, High Yield – Bloomberg High Yield
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