Weekly Newsletter January 20th to January 24th
RECAPPING LAST WEEK
U.S. equities posted a second straight week of gains, fueled by investor optimism for artificial intelligence investment, corporate earnings, and potential pro-business policies of the new administration. The S&P500 index rose 1.7% to a record weekly closing high, erasing last month’s losses. The Nasdaq Composite also gained 1.7%, while the Russell 2000 advanced 1.4%. Energy was the lone S&P500 sector to finish lower, as crude oil slumped 3.5% on President Trump’s remarks at the World Economic Forum calling for lower oil prices. Bitcoin surged to a new record above $110k before pulling back slightly, as traders took stock of a possible U.S. strategic reserve for the cryptocurrency. U.S. Treasury yields were modestly higher in a week that lacked impactful economic data. U.S. business activity slowed in January, but price pressures increased, according to the S&P Global flash PMI indices. The services reading fell to 52.8 from 56.8 the prior month, while manufacturing PMI edged into expansion territory at 50.1. Inflationary pressures intensified to a four month high, with input costs and selling prices rising at increased rates across both sectors. Continuing jobless claims reached the highest level since November 2021, suggesting new jobs may be getting harder to find. Existing home sales rose for a third straight month in December, but sales for all of 2024 were the lowest since 1995 as the housing market was pummeled by high mortgage rates and home prices along with low supply. U.S. consumer sentiment slipped in January from its initial reading while one-year inflation expectations remained steady at 3.3%. Overseas, the Bank of Japan raised interest rates by a quarter-point to 0.5%, a move that was heavily signaled in hopes of avoiding the market turmoil from August’s rate hike. The BOJ said it would be closely watching upcoming wage negotiations for further policy adjustments. Japan’s national core CPI reached a 16- month high of 3% in December. China left its main lending rates unchanged last week, but the government continued to try to support a struggling stock market by directing state-owned insurers and mutual fund managers to channel more investment into shares. In Europe, positive flash PMI data sent the euro soaring versus the U.S. dollar. January’s composite reading moved into expansion territory for both Germany and the Eurozone while confidence in future activity increased. Growth in British businesses flagged to begin the year and price pressures rose, highlighting the challenges facing the Bank of England. There were signs of a softening UK labor market as the unemployment rate ticked higher, but wage growth remained stubbornly strong. Finally, Canada’s inflation rate slowed in December, helped by a sales tax break, which offset a rise in retail sales.
THE WEEK AHEAD
A busy week awaits with central bank decisions, GDP updates, and fresh inflation readings on the schedule. In the U.S., the Federal Reserve is widely expected to pause after lowering its benchmark rate by a full percentage point last year. More benign inflation data is likely needed to tip the scales as to when another rate cut is back on the table. Friday’s core PCE price index for December is expected to reveal as light uptick from the prior month while the annual measure stays flat at+2.8%. Wednesday’s first estimate of Q4 2024 GDP is forecasted to come in at+2.6%, down from the prior quarter’s +3.1% but still representative of a strong economy. It’s a big week for U.S. corporate earnings with reports due from four of the “Magnificent Seven” mega-cap technology companies— Apple, Meta, Microsoft, and Tesla. The rest of the domestic economic agenda includes consumer confidence, new and pending home sales, and durable goods orders. Elsewhere, last week’s rally in the euro may be short lived as the European central bank is set to lower interest rates on Thursday by a quarter point. Another rate cut is expected in March given the region’s economic woes, so any commentary to the contrary could support the currency. BlackRock CEO Larry Fink told delegates at the World Economic Forum that pessimism about the European economy has never been more profound than today. The Bank of Canada is also expected to cut rates on Wednesday to 3% as growth has slowed and the threat of U.S. trade tariffs looms. Inflation updates from Japan and Australia round out the international calendar.
CHART OF THE WEEK
S&P500 riding the waves
The S&P500 index (SPX) rallied to fresh record highs three times last week, including an all-time closing high on Thursday and a weekly closing high. Stocks stumbled out of the gate in 2025 but have quickly reversed course. From a technical perspective, the week of January 13 produced a large bullish engulfing candlestick pattern, with a strong followthrough last week. Elliott Wave analysis may help narrow down the potential paths forward. In the more bullish case, waves 1 and 2 took a year to complete, from October 2022 to October 2023. Since then, price has remained in the same upward channel as a standard impulse wave 3 typically does. Breaking down wave 3 into a smaller subset, waves i and ii seem clear, while wave iii has developed as expected in five waves, the last of which is still in progress with a potential target of $6,400. There has been a MACD bearish divergence—lower highs on the indicator as price moves higher—which indicates a potential correction in the future. However, for now the MACD has turned higher with room to move up to resistance as SPX eyes $6,400. That technical target is two degrees smaller than the final top, meaning there could be another smaller degree wave iv and v to finish off the larger wave 3, then another wave 4 and 5 to complete the full set. There is a lot that needs to occur for this potential wave count to play out, but SPX may have the potential to surpass $7,000 in 2025, especially if interest rates and the U.S. dollar start to trend lower while the economy and corporate earnings remain solid.
Source: Charles Schwab Corporation
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