S&P 500 Grinds to a New All-Time High
Photo Credit: Josh Beech, Unsplash
Weekly Market Recap for February 21st
This week, the S&P 500 fell 1.63% over the shortened week, capped by a Friday sell-off after consumer sentiment disappointed expectations, long-term inflation expectations have been at their highest since 1995, and the South China Morning Post reported a new coronavirus. Treasury yields dropped moderately over the week due to speculation about the timing and pace of interest rate cuts from the Federal Reserve Bank. Several Fed members also made statements expecting rates to stay steady for now, citing consumer prices that were hotter than expected. However, on Wednesday, minutes from the Fed meeting showed that policymakers are concerned about the debt ceiling. The market-implied probability of an increase to the Federal Funds Rate during the March meeting remained near zero at 6%, with the likelihood of an increase at the May meeting increasing from 19% to 27%.
S&P 500 Index (Last 12 Months)
S&P 500 Technical Composite (Last 24 Months)
Bull Bear Market Gauge
US Market Economic Cycle
S&P 500 Sets a New High
The S&P 500 set another all-time closing high this week, but the way it’s setting new highs is notable. Since the election, the index has mostly moved sideways, hinting at an underlying market rotation. In December, the Magnificent 7 drove the index higher while much of the market traded lower, as shown by the Equal-Weight and Value factors. That trend reversed in early 2025, with Equal-Weight and Value outperforming as the Magnificent 7 lagged. This shift is evident in our US Breadth Indicator (USBI), which showed market breadth weakening through December before improving this year. While broader participation is positive, it removes a tailwind for the market cap-weighted index. Low USBI readings, such as the 34 in early January, are historically contrarian. This year’s broadening rally has lifted USBI to 55, but the key question is what’s left to fuel further gains. The Magnificent 7 and the rest of the index are moving out of sync, and valuations remain expensive. Similar environments have delivered less attractive forward returns, with the potential for further gains and increased downside risk.
Consumer Spending Slows
In January, retail sales fell by -0.9% month-over-month, below expectations for a flat reading. Excluding autos and fuel, spending declined by a smaller -0.54%, the most since January 2024. Control group retail sales, which feed into GDP calculations, fell by -0.82%, the most significant decline since March 2023. The slowdown was broad-based and follows a surge in consumer spending at the end of 2024. The miss was partially attributed to cold weather and wildfires in California, but like last week’s inflation data, the potential impact of seasonality comes into play. Retail sales are highly seasonal, with a large drop in spending early in the year after the Q4 holiday season. The key takeaway is that consumer spending was still higher than a year ago, but the pace slowed after the year-end rise. The slowdown reduces the upward pressure on rates, as the Fed must weigh the implications for both sides of its mandate. Following the report, the market pulled forward the expected timing of the next rate cut to June.
Consumer Spending Control Group Posts Biggest Decline Since March 2023
Retail Sales vs Seasonal Adjustments
Industrial Production Expanded
The US saw industrial production expand by +0.5% m/m in January, its second consecutive strong month. Utilities/Energy (boosted by cold weather) and Business Equipment (as aircraft & parts rebounded after Boeing’s strike) drove the growth. However, these gains masked underlying softness in other sectors. The manufacturing subindex fell by 0.1%, and mining fell by 1.2% as oil drilling slowed. One of the more notable declines occurred in the auto and auto parts category, which fell -5.2% m/m compared to the prior month. Excluding autos, manufacturing rose +0.2% month over month, its second consecutive increase after three prior declines. Over the past 12 months, the index rose by +2%, its most significant annual advance since October 2022. This recent momentum is encouraging after 2.5 years of sluggish growth, with manufacturing weighed down by high interest rates and weak business investment. The improvement aligns with two metrics: (1) the ISM Mfg PMI, which in January rose above 50 for the first time since October 2022, and (2) our PMI Momentum Indicator (USPMI), which accurately forecasted the current manufacturing rebound over 12 months ago.
US Industrial Production Change (% Year over Year)
US Industrial Production Index by Category
January Economic Trends
Last week’s market update discussed our focus on how rising Treasury yields are impacting the economy. While this week's report suggests higher rates are impacting spending, housing, and specific manufacturing segments. January's cold weather, wildfires, and seasonality make the answer far from definitive. This week's other releases included:
Building Permits and Housing Starts
Commentary: Starts plunged -9.8% m/m after December surge, with single and multi-family both falling. However, permits were flat, holding near an 11-month high and offering a glimmer of hope for future activity.
Building Permits
Actual: 1,483k
Consensus: 1,460k
Prior: 1,482k
Housing Starts
Actual: 1,366k
Consensus: 1,397k
Prior: 1,515k
Atlanta Fed Wage Tracker
Commentary: The slowest pace of wage inflation since October 2021 is not far from the pre-COVID trend. The wage premium for job switchers over job stayers continues to decline, signaling a less tight labor market. Lower wage inflation supports the Fed's disinflation efforts but also means lower income for consumers.
Actual: 4.1% Year over Year
Atlanta Fed Wage Growth Tracker
Wage Premium for Job Switchers Continues to Fall
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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