Home Sales Plunge to 30-Year Low

We're in a tricky economic moment, folks. February 2nd, 2025, and the financial markets are sending us mixed signals, leaving many scratching their heads. Just when the stock market hits a new high, suggesting everything's rosy, new tariffs are thrown into the mix, threatening to disrupt global trade. It's like a tug-of-war between optimism and looming worries.

Corporate earnings are strong, which is good news, but consumer confidence is starting to dip – a potential red flag. Are people starting to feel less secure about the future?

Across the globe, Japan is making a surprising move by raising interest rates, while the U.S. Federal Reserve is expected to hold steady. This difference in approach adds another layer of complexity to the global economic picture.

And let's not forget housing. It's still struggling under high interest rates, a clear sign that parts of the economy are feeling the pressure.

This week is packed with important economic reports, including GDP figures. These numbers will be crucial in telling us which way the wind is blowing. Are we heading for continued growth, or is there a slowdown on the horizon? Investors are on edge, trying to decipher the signs and navigate this uncertain terrain.

Insights

• Trade Wars are Back: The Trump administration's new tariffs on Canada, Mexico, and China aren't just headlines; they're potential game-changers. Expect supply chain disruptions and higher prices hitting consumers directly.
• Stock Market Party or Mirage?: The S&P 500's record high is impressive, but is it sustainable? Fueled by strong earnings, yes, but it might also be overlooking deeper economic anxieties. Is the market accurately reflecting reality, or is it a bit too exuberant?
• Economic Puzzle: Strength vs. Weakness: It's a mixed bag. Robust corporate earnings and a booming stock market are countered by weakening consumer sentiment and a sluggish housing market. This divergence creates a volatile and unpredictable economic landscape.
• Global Central Banks Diverge: Japan raising interest rates while the Fed stands pat signals a global monetary policy split. This could lead to currency swings and shifts in international investments. Keep an eye on how this plays out.
• Data Will Drive the Narrative: This week's GDP and inflation data releases are not just numbers; they're critical pieces of the puzzle. They will dictate market direction and economic sentiment for the coming months. Pay close attention.

Context and Background

The global economy in early 2025 is a bit like a tightrope walker balancing strength and fragility.

For years, we've had historically low interest rates and massive injections of money into the economy – a response to the 2008 financial crisis and then the pandemic. This has shaped a very unusual economic environment.

On the bright side, companies have seen profits soar, and the stock market has been on a tear, boosted by readily available cash and investor optimism.

Think of it like this: imagine the stock market as a bouncy castle inflated by years of easy money. It can keep bouncing higher, even if the ground underneath starts to get shaky.

However, there's a flip side. Inflation, which was initially brushed off as temporary, has stuck around longer and stronger than many expected. It's eating into people's paychecks and savings, forcing central banks to rethink their easy-money policies.

Inflation is like a sneaky tax, slowly stealing the value of your money.

And then there are the global political tensions.

The resurgence of protectionist trade policies, like the new tariffs from the Trump administration, is a major concern. It threatens to unravel the complex global supply chains we rely on and could spark trade wars.

These tariffs are like throwing a wrench into the gears of global trade, potentially slowing everything down and making things more expensive for businesses and consumers.

Adding to the uncertainty, consumer sentiment – how people feel about the economy – is starting to wobble. This is a key indicator because consumer spending is a huge engine of economic growth. If people are feeling uneasy, they tend to spend less, and that can have ripple effects throughout the economy.

Consumer sentiment is the fuel in the economic tank. If it starts to run low, the engine can sputter and stall.

Key Developments

1. Trade War 2.0: Tariffs are Back. In a move that's sending shockwaves through global markets, the Trump administration has slapped new tariffs on some of America's biggest trading partners: Canada, Mexico, and China.

Imports from Canada and Mexico will face a steep 25% tariff, while goods from China get hit with an additional 10% levy.

The White House says this is about curbing illegal immigration, boosting American manufacturing, and increasing government revenue.

But economists are raising serious alarms about the potential fallout.

The numbers are stark.

Experts predict Canada's economy could shrink by 3.6%, and Mexico's by 2%. For the U.S., inflation could jump by a full percentage point, potentially reaching an annual rate of 4%.

Consumers will likely see higher prices on everyday items, from avocados and beef from south of the border to cars, given the deeply intertwined supply chains across North America.

Some analysts estimate car prices could rise by an average of $3,000.

Interestingly, there was a surge in imports in December, suggesting businesses were trying to get ahead of the tariffs, like filling up the pantry before a price hike.

2. Stock Market Defies Gravity: S&P 500 Sets New Record. Against a backdrop of economic uncertainty, the S&P 500 index, a key barometer of the U.S. stock market, has soared to a new all-time high, breaking a record set just seven weeks prior.

This rally, now in its second week, saw the S&P 500 jump on Thursday, lifting the Dow Jones Industrial Average and NASDAQ along for the ride, both posting weekly gains of about 2%.

While the Dow and NASDAQ are still a bit shy of their own record highs from last month, the S&P 500's milestone highlights a persistent bullish mood in the market, even amidst economic headwinds.

3. Earnings Bonanza: Q4 Corporate Profits Explode. The ongoing fourth-quarter earnings season is revealing a picture of robust corporate health.

Current projections point to a 12.7% year-over-year surge in net income for S&P 500 companies. If these estimates hold true, it would be the strongest quarterly earnings growth in three years.

Positive earnings surprises and analysts revising their forecasts upwards are fueling this optimistic outlook.

These strong earnings provide a solid foundation for the stock market's rally, indicating that companies are, at least for now, navigating the economic challenges and delivering impressive financial results.

4. Japan Breaks Ranks: Interest Rates Hiked. In a move that deviates from the global trend, the Bank of Japan (BOJ) has increased its short-term policy interest rate from 0.25% to 0.50%.

This is the highest interest rate Japan has seen since 2008, signaling a potential shift away from decades of ultra-loose monetary policy designed to combat deflation.

The BOJ's action is widely seen as an attempt to finally tackle the persistent deflationary pressures and long-term economic stagnation that have plagued Japan.

Japanese government bond yields reacted immediately, rising in response to the rate hike, reflecting the market's expectation of further policy adjustments.

5. Consumer Confidence Faltering: Sentiment Takes a Dip. The latest University of Michigan survey on consumer sentiment reveals a worrying trend: consumer confidence weakened in January, the first decline in half a year.

More and more respondents are anticipating rising inflation and unemployment in 2025. This shift in consumer outlook is significant because consumer spending makes up a large chunk of the U.S. economy.

A drop in consumer sentiment can be an early warning sign of slower spending and potentially weaker economic growth ahead. If people become pessimistic, they tend to tighten their purse strings, impacting businesses across the board.

6. Oil Prices Retreat: Cooling Down After Gains. After a period of sustained increases, crude oil prices have pulled back noticeably, falling over 3% for the week.

This drop ends a four-week streak of gains.

By Friday, oil was trading around $74 a barrel, down from a recent high above $80 on January 15th. Despite this weekly decline, oil prices are still up about 5% since the start of the year.

The retreat in oil prices could offer some relief to consumers at the gas pump and potentially ease inflation, although the year-to-date increase still reflects underlying tightness in energy markets.

7. Housing Market Blues: Home Sales Hit 30-Year Low. The U.S. housing market remains under pressure from high interest rates.

The National Association of Realtors reported that existing home sales in 2024 plummeted to their lowest full-year level since 1995. Total sales for the year reached 4.06 million, slightly down from 2023.

Persistently high mortgage rates are consistently cited as the main reason for the sluggish housing market. The housing market is often seen as a bellwether for the broader economy, and its current weakness is raising concerns about overall economic momentum.

8. Fed Watch: Policy Meeting in Focus. Market watchers are intensely focused on the upcoming Federal Reserve policy meeting, which concludes on Wednesday, February 5th.

The overwhelming expectation is that the Fed will hold interest rates steady. However, investors will be poring over the post-meeting comments from Fed Chair Jerome Powell for any hints about future policy moves.

Recent mixed inflation data has created uncertainty about the timing and extent of potential future rate cuts. The Fed's communication will be crucial in shaping market expectations and influencing borrowing costs throughout the economy.

9. Economic Scorecard: Q4 GDP Report on Deck. The first estimate of fourth-quarter U.S. economic growth is scheduled for release this week, on Thursday, February 6th.

Expectations are for continued solid growth, following a strong 3.1% annualized rate in Q3 and 2.0% in Q2.

This GDP report will provide a critical snapshot of the economy's momentum as we head into 2025. Strong GDP growth would suggest resilience in the face of headwinds, while weaker-than-expected growth could amplify concerns about a potential slowdown.

10. Retailer in Trouble: Five Below Stock Plunges. Discount retailer Five Below (NASDAQ:FIVE) is facing significant investor challenges.

Its stock price has crashed 48% over the past year, significantly underperforming the broader market's 25% gain.

Longer-term performance is equally weak, with a 45% drop over the last three years. Recent financial results showed a slight 0.4% decline in earnings per share (EPS).

The stark difference between the stock price drop and the relatively small EPS decrease suggests deep-seated investor worries about the company's future. While some contrarian investors might see this as a potential buying opportunity, the risks are substantial.

Market Implications

The new tariffs inject a big dose of uncertainty into global trade, potentially leading to higher prices and slower economic growth down the line. This could put pressure on corporate earnings in the future, despite the current strong Q4 results.

The stock market's record high, while seemingly positive, might be overly optimistic, perhaps ignoring the weakening consumer sentiment and the struggling housing market.

The Bank of Japan's rate hike, a move towards tighter monetary policy, stands in contrast to expectations for the Fed to remain on hold. This divergence could lead to currency fluctuations and impact global investment flows.

The upcoming Fed meeting and Q4 GDP report are key events to watch. Jerome Powell's words will be carefully analyzed for any clues about the Fed's next steps. A hawkish tone, suggesting a continued focus on fighting inflation, could dampen stock market enthusiasm and potentially push bond yields higher.

On the other hand, a dovish stance, hinting at possible rate cuts, could further fuel the stock market rally but might also raise concerns about persistent inflation. The Q4 GDP report will give us crucial data on the economy's underlying strength.

Strong growth would support the bullish view in the stock market, while weak growth could confirm fears of a potential slowdown and trigger a market correction.

Five Below's stock troubles serve as a reminder that not all sectors are thriving in the current environment, and that individual company risks remain significant even amid broader market optimism.

Expert Perspectives

Financial analysts are offering a range of opinions on this complex economic picture. Some argue that the stock market's rally is justified by strong corporate earnings and underlying economic resilience.

Others are more cautious, highlighting the potential dangers of tariffs, declining consumer sentiment, and the delayed effects of past interest rate hikes.

The differing monetary policies of Japan and other major central banks add another layer of complexity, with potential consequences for currency markets and global investment strategies.

Mohamed El-Erian, Chief Economic Advisor at Allianz, recently commented on the delicate balance the Fed is trying to strike:

"The Fed is attempting a very difficult soft landing, and the path to get there is very, very narrow."

Regarding the Bank of Japan's rate hike, economists at major financial institutions are emphasizing the significance of this shift.

Former BOJ board member Sayuri Shirai noted the long-term implications:

"This is a historical turning point for Japan. It signals the BOJ's resolve to finally break free from deflation and normalize monetary policy."

On the topic of consumer sentiment, surveys are being closely watched as a leading indicator of economic health.

Lynn Franco, Director of Economic Indicators at the Conference Board, has highlighted the importance of consumer confidence:

"Consumer confidence is a critical driver of economic activity. A sustained decline can signal a pullback in spending, which can have significant consequences for growth."

Analysis

The current financial news landscape is a confusing puzzle of conflicting signals. The stock market's exuberance, fueled by impressive earnings, clashes with the growing worries of trade tensions and shaky consumer confidence.

It's like the market is throwing a party while storm clouds gather on the horizon. The tariffs are a wild card, with the potential to disrupt supply chains and drive up prices. They could act as a drag on economic growth and fuel inflation.

Strong corporate earnings offer some cushion, but it's uncertain how long companies can maintain these profit levels if costs rise and trade is disrupted. Consumer sentiment is the critical factor.

If consumers become hesitant to spend, the economic momentum could falter, despite the current strength in corporate profits and the stock market. Japan's rate hike is a significant development, underscoring the divergence in global monetary policy.

While the Fed is expected to stay put, the BOJ's move suggests that the era of ultra-low interest rates might be ending globally. This could have wide-ranging effects on borrowing costs, asset valuations, and currency exchange rates around the world.

The continued weakness in the housing market is a persistent concern, highlighting how sensitive this sector is to interest rate changes.

The upcoming Fed meeting and GDP report will provide crucial data points to help clarify the economic outlook.

Investors should prepare for potential volatility as the market processes these mixed signals and awaits more clarity on the direction of the economy and monetary policy.

Future Outlook

Looking ahead, the near-term direction of the market and the economy depends on several key factors. The impact of the new tariffs will unfold over the coming months, and any retaliatory actions from trading partners could further escalate trade tensions.

The strength of consumer spending will be crucial in determining whether the current economic expansion can continue. The Fed's policy decisions, guided by incoming inflation and growth data, will significantly influence market sentiment and borrowing costs.

The Q4 GDP report and subsequent economic releases will provide vital clues about the economy's underlying momentum.

Possible scenarios range from continued moderate growth with persistent inflation to a sharper economic slowdown, potentially triggered by trade disruptions or a more pronounced drop in consumer spending.

The stock market's ability to maintain its record highs will hinge on sustained earnings strength and investor confidence in the economic outlook. Volatility is likely to remain high as the market navigates these uncertainties.

Investors should consider a diversified portfolio and be ready to adjust their strategies as the economic landscape evolves. The coming weeks will be crucial in shaping the economic narrative for the rest of 2025.

Key Financial Events

• Monday, February 3, 2025: US ISM Manufacturing PMI (January 2025), US Construction Spending (December 2024)
• Tuesday, February 4, 2025: US JOLTs Job Openings (December 2024), US Factory Orders (December 2024)
• Wednesday, February 5, 2025: US ADP Employment Change (January 2025), US Balance of Trade (December 2024), US S&P Global Services PMI Final (January 2025), US ISM Services PMI (January 2025), Federal Reserve Policy Meeting concludes with rate unchanged at 5.25%-5.50%
• Thursday, February 6, 2025: US Q4 GDP Report (Advance Estimate), US Pending Home Sales (December 2024)
• Friday, February 7, 2025: US Employment Situation (January 2025) - Jobs Report

Corporate Earnings

• Mega-Cap Tech: AAPL (Apple Inc.), MSFT (Microsoft Corporation), AMZN (Amazon.com Inc.), GOOGL (Alphabet Inc.), META (Meta Platforms Inc.), NVDA (NVIDIA Corporation)
• Electric Vehicles: TSLA (Tesla Inc.)
• Financials: JPM (JPMorgan Chase & Co.), V (Visa Inc.), BAC (Bank of America Corporation), MA (Mastercard Incorporated)
• Retail: WMT (Walmart Inc.), HD (The Home Depot Inc.)
• Consumer Staples: PG (Procter & Gamble Company)
• Healthcare: JNJ (Johnson & Johnson), UNH (UnitedHealth Group Incorporated), PFE (Pfizer Inc.)
• Energy: XOM (Exxon Mobil Corporation)
• Software: ADBE (Adobe Inc.)
• Telecom: CMCSA (Comcast Corporation)