Key Takeaways from Latest Jobs and Inflation Reports

Photo Credit: Eduard Delputte, Unsplash

Weekly Market Recap for February 14th

This week, the equity market remains range-bound, trading sideways for another week. Smaller companies underperformed, with the Russell 2000 trading lower by over -1%, while the S&P 500 posted a +0.5% gain. Factor return dispersion was limited, and there was no clear trend at the sector level, with Consumer Staples, Technology, and Utilities the top performers. In contrast, Financials, Health Care, and Real Estate traded lower. The market continues searching for direction, but as discussed below, the rally’s recent moderation suggests the risk/reward is unfavorable. In the credit market, bonds traded lower this week as Treasury yields rose after the CPI report. The move higher was partially reversed after Thursday’s PPI release, although longer-duration bonds underperformed. The VIX roundtripped and ended the week unchanged despite being elevated most of the week. The U.S. dollar weakened slightly, boosting international stocks, and the oil price ended the week +1% higher.

S&P 500 Index (Last 12 Months)

S&P 500 Technical Composite (Last 24 Months)

Bull Bear Market Gauge

US Market Economic Cycle

Technical Setup

The S&P 500 continues to hover around its 50-day moving average after trading sideways for most of the past three months. The sideways action started in the days immediately after the election when Donald Trump’s win triggered a cross-asset rally.

What’s next?

We examined periods when the S&P 500 gained over +20% in the past year but less than +3% in the most recent three months—similar to today’s setup of strong longer-term gains with recent moderation. Forward returns, specifically the next 3- and 6-month periods, tend to be less attractive. While the average and median returns are similar, the win rates are lower, with more downside risk. Investors can still earn attractive returns over longer horizons, but these environments often feature higher volatility and greater downside exposure. The stalling rallies highlight the potential for mean reversion, which makes the risk/reward profile less favorable. As we have mentioned recently, today’s market environment is challenging, with fatter-than-usual tails in both directions.

Instances When S&P 500 Longer-Term Rally Stalls

The Momentum Factor Leads Markets in 2025

January Jobs Report

Unemployment fell to 4.0% in January from 4.1% in December, the lowest level since May 2024. Job growth totaled +143,000, with Health Care, Retail Trade, and Government driving most of the increase. Revisions to previous months’ data were positive, with November and December revised higher by a combined +88,000. The report revealed a slowing but steady labor market that remains tight compared to before the pandemic. The prime-age working participation rate (aged 25-54) is slightly above its pre-pandemic level, but participation among those 55 and older is about -1.5% below early 2020. The slowdown in job growth is a potential concern, but we view it as a signal of the labor market’s tightness rather than underlying weakness. While the January jobs report was weaker than expected regarding new additions, the broader strength and upward revisions to prior months’ data reduced expectations for near-term rate cuts. The Fed used rising unemployment in mid-2024 to justify rate cuts, but recent data suggests the labor market is not weakening as much as previously thought.

Unemployment Falls to 8-Month Low

Labor Force Participation Rate Trends Diverge

Inflation Surprises to the Upside

Headline CPI rose by +0.5% month-over-month, the fastest pace since August 2023. Likewise, Core CPI rose by +0.4%, the highest since March 2024. January’s CPI report showed broad-based increases across categories. With inflation already a key concern, the hotter-than-expected report sparked a big reaction. Stocks and bonds sold off immediately after the release, and the 10-year Treasury yield jumped over 10 basis points to 4.65%. The key takeaway: we have moved past peak disinflation. Early disinflation was driven by goods deflation, but that tailwind is fading. Now, progress relies more on services disinflation, which is slower compared to goods. This puts into question the likelihood of the Fed reaching its 2% target in the near future. January’s hot report raises an important question: Is inflation reaccelerating, or are seasonal adjustments distorting the data? Many businesses raise prices at the start of the year, and it can be challenging to model and make the appropriate seasonal adjustments accurately. Seasonal adjustments continue to mislead the Fed and the market by underestimating the magnitude of early-year price increases, which overstates inflation. As we did in June 2024, when inflation was lower than expected, we examined headlines from the January 2024 CPI report: “Inflation ticks up in unwelcome surprise,” “US Inflation Tops Forecasts in Blow to Fed Rate-Cut Hopes,” and “Supercore Inflation Jumped in January, Suggesting Continuing Inflation Pressures.” Early 2024 concerns proved to be overstated, and the trend reversed in Q2, producing euphoria that inflation was declining. We were skeptical of the inflation deceleration then, and we are equally skeptical of today’s apparent reacceleration. This is seasonal noise rather than a trend change.

Inflation Reacclerates at the Start of 2025

January CPI Increases by Category

Look Ahead

Next week brings several important ‘hard data’ releases, starting with today’s retail sales and industrial production, followed by next Wednesday’s housing starts and building permits. We are focused on how the rise in Treasury yields during Q4 and the related tightening of financial conditions are impacting the economy. Elsewhere, the calendar is quiet as we enter the later stages of earnings season, meaning the market’s attention is likely to remain on Washington, D.C.

Important Disclosures
This material is provided for general and educational purposes only and is not investment advice. Your investments should correspond to your financial needs, goals, and risk tolerance. Please consult an investment professional before making any investment or financial decisions or purchasing any financial, securities, or investment-related service or product, including any investment product or service described in these materials.

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