Weekly Update: Market Volatility is Inevitable

The CNN Fear and Greed Index measures 7 technical indicators of market risk. When it dips below 20, the market is in a state of "Extreme Fear". This seems to happen a couple times a year, and often when the market is down substantially from its peak. The index fell to19 on Thursday and sits at 20 after Friday's close. Interestingly, though, the S&P 500 hasn't declined less than 5% off its highs. 

Our interpretation of this is that short-term volatility remains on the table for 2025 given the heated political and geopolitical environment. However, the more important story, in our opinion, is that consumers and businesses seem to be in good health, and there also seems to be plenty of liquidity in the financial services and banking sector. Once we see signs of excess in the borrowing and lending markets and/or a significant pick-up in defaults, we are likely to change our perspective. 

Despite rising sharply on Friday, the U.S. equity market wrapped up February on a bleak note. The tech-heavy Nasdaq composite slid nearly 4%, while the S&P 500 and Dow Jones posted down around 1.5%. Much of the decline came in the final trading week of February over concerns of slowing economic growth, uncertainty related to fiscal policy changes, and rising geopolitical risks. 

Market pullbacks are to be expected and should not concern investors. February tends to be a weak month, while March tends to be a better month for market returns, with the S&P 500 providing positive returns 65% of the time, according to CFRA Research.¹   

We believe the economy and consumers are still in good shape, as recent economic data supports. 

U.S. economic growth has remained solid as consumer spending (which comprises nearly 70 percent of GDP) continued to boost the economy higher in 2024. Gross domestic product (GDP) tracked at a 2.3% pace in the fourth quarter, in line with expectations but below the 3.1% growth rate seen in the third quarter. Full-year GDP accelerated 2.8% compared to 2.9% in 2023, both historically above the average. This is the second of three total estimates. 

In the quarter, consumer spending rose by a robust 4.2% rate, while federal government spending also contributed, showing a solid 3.2% rise. Trade offset growth with imports, which is subtracted from the GDP calculation, up 0.8% and exports down 0.8%. Gross private domestic investment also dropped 5.6%, along with inventories falling, partially offsetting growth.

The GDP report shows how influential strong consumers have been throughout 2024 in driving the broader economy higher despite elevated prices. 

Overall, the U.S. economy is proving to be remarkably durable and resilient as growth continues to exceed 2.0%. 

Furthermore, the personal consumption expenditure price index (PCE), a key indicator of the average change in price for all domestic personal consumption and the Federal Reserve’s preferred inflation gauge, was also released in the prior week showing pricing pressures eased slightly in January. 
The headline gauge increased by 0.3% for the month, bringing the annual inflation rate to 2.5% (from 2.6%). Core PCE, which excludes volatile categories of food and energy, also rose by 0.3% for the month, bringing the annual core inflation rate to 2.6% (from 2.9%). 

The report also outlined changes to income and spending. Personal income rose sharply by 0.9%, compared to expectations of 0.4%. However, higher income did not transfer into increased spending, which saw a decline of 0.2%, compared to expectations of a 0.1% gain. The income most likely went into savings, as the personal savings rate accelerated to 4.6%.

The report comes as the Federal Reserve committee members weigh their decision for the next monetary policy move. Policymakers have recently taken a more patient stance after cutting the federal funds rate by a full percentage point in the last four months of 2024. 

Many officials have expressed hopes and expectations that inflation will gravitate lower throughout the year. However, they have cited needing more evidence that inflation is sustainably heading back to their long-term goal before initiating lower interest rates. 

Ultimately, the data shows that pricing pressures remain firmly above the Fed’s long-term target of 2.0%, meaning the committee will likely hold rates steady in the near term.

[1] U.S. stocks had a rocky February | Morningstar

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