Weekly Market Update: January 13, 2025

The Federal Reserve will hold its first Federal Open Market Committee (FOMC) meeting of 2025 at the end of this month. Sentiment is that the FOMC will keep the federal funds rate at 4.25% to 4.50%. The expected pause after three interest-rate reductions to end 2024 will likely be the result of a modest uptick in inflation this past fall. On the positive side, the re-acceleration was fueled by better-than expected growth in the second half of last year. 

The gross domestic product (GDP) likely expanded by an estimated annualized rate of 2.0% in the fourth quarter. The advance was powered by the strength of the consumer sector. The late-year optimism among consumers produced robust holiday sales, including record spending on both Black Friday and Cyber Monday. This was significant, as manufacturing activity and residential and nonresidential construction remain soft. According to the Institute for Supply Management, economic activity in the manufacturing sector contracted in December for the ninth-consecutive month and the 25th time in the last 26 months.

The increase in consumer spending was driven, in part, by borrowing that can be considered excessive. The New York Federal Reserve Bank reported that U.S. credit card debt climbed to $1.17 trillion during the September quarter, marking the highest level since the Fed began recording such data in 2003. Not surprisingly, lenders wrote off more than $46 billion in delinquent credit card loans through the first nine months of 2024, a 50% year-over-year increase and the highest level since 2010. This expanding credit-card bubble could spell some trouble for the consumer later this year. 

Meanwhile, Donald J. Trump is set to take the Presidential Oath of Office on January 20th. The incoming Trump Administration will look to lower taxes and ease regulations. If successful, this could potentially put upward pressure on prices and bring more worries about inflation. However, the Fed still may have to walk a tightrope on how restrictive it keeps lending rates, given the recent rise in loan defaults. 

Conclusion: With equity valuations elevated entering 2025 and some building headwinds for investors, including higher borrowing costs, increased stock market volatility over the next 12 months is plausible. Given this backdrop, a portfolio led by more stable, high-quality stocks may be warranted.

Source: ValueLine.com