Plus, updates on inflation, earnings, retail sales and the Federal Reserve.
Now that my youngest sons are grown up seventh graders at a secondary school, this was the first time in years that I was not in the business of helping my fidgety and not-quite-so-artistically-gifted twins put together Valentine’s Day cards for their whole class.
In years past, each time this day rolled around, I would patiently set out art supplies, buy stickers and lots of glitter, and use all my powers of persuasion to convince my boys to sit for longer than five minutes to complete their mission. I would suggest (according to them) cringeworthy sayings and recommend they consider adding hearts and flowers to adorn the trucks and trains that were about the only drawings I could eke out of the exercise. Finally, somewhere halfway through the alphabetical class list, they would grow weary of expressing their affections and I would have to take over to bring it home. By the way, you’re welcome to all those kids whose names begin with N to Z—I hope you felt my love for you through the years.
Happy Valentine’s Day to you, too, my dear readers. I hope you have the good fortune to both give and receive love, and like any good economist, I also hope you spend some money to show that love and keep the engine of growth going. In the U.S., Valentine’s Day spending is estimated to be a whopping $27.5 billion, according to the National Retail Federation. These numbers include $500 million on roses alone. Cards and sweets are typically the biggest sellers, though dining out and entertainment are the other major spending categories. I bet you would not have guessed that pet owners spent $1.5 billion on Valentine’s Day gifts for their pets last year, according to Capital One Shopping. Woof.
It will be good for all of us to have a respite from this whirlwind environment of calibrating to earnings reports and fast-moving fiscal and monetary headlines. It’s enough to make one want to eat a full box of chocolates with a splash of wine. Speaking of breaks, for the moment, the markets were pleased with the breaks and pauses being offered on the tariff front, which allowed markets to trend higher this week in response to earnings reports and mostly benign economic data.
While President Trump said he will implement a 25% tariff on steel and aluminum imports, they won’t begin until March 12. Likewise, he signed a plan for reciprocal tariffs but delayed their implementation as his administration launches negotiations on a one-by-one basis with nations that could be affected by them. There were no delays on the duties on China, which went into effect last week. China promptly retaliated, though the response was measured. Trump is planning to speak with Chinese President Xi Jinping soon, leaving hope for a potential compromise instead of escalation.
Recall also that the proposed 25% tariffs on goods from Mexico and Canada have been temporarily halted until March after Mexico agreed to increase its presence on the U.S. border to 10,000 troops with a specific target of seizing illegal drugs and stopping undocumented immigrants. Canada agreed to spend $1.3 billion to reinforce the border and stop the flow of fentanyl into the U.S. Markets rose as the immediate effects of these plans were delayed on the hopes that the largest impacts of tariffs will be averted by the president’s negotiation tactics.
Also on hold is the Federal Reserve, as Chairman Jerome Powell reiterated this week in his semiannual testimony before Congress. Powell delivered a message of patience, saying policymakers need not be in a “hurry” to further adjust rates lower. Indeed, after just 100 basis points in rate cuts beginning in September, the Fed opted to move to the sidelines in January, holding rates steady at a range of 4.25% to 4.50%, as expected.
But with an upwards assessment of labor market conditions and a downwards assessment of inflation improvement, the Federal Open Market Committee appears increasingly willing to remain on the sidelines beyond the start of the year as the data continues to evolve and policymakers are better able to assess the impact of fiscal policy initiatives. President Trump responded to this news on social media by saying, “Interest rates should be lowered, something which would go hand in hand with upcoming tariffs!!!”
As inflation numbers rolled in this week, there was some disappointment as the consumer price index (CPI) rose 3% year-over-year in January, the largest annual increase in seven months. Likewise, the producer price index (PPI) rose 3.5%, surpassing the 3.3% gain expected.
One prominent example of inflation can be found in every supermarket. This week, the price of eggs hit a record high of $4.95 a dozen, prompting Waffle House to add an egg surcharge to its menu. Bird flu is to blame for this egregious price surge, but it is also emblematic of supply/demand imbalances and the overall risk we face of inflation’s sinister effects embedding further into the system and holding back consumers.
On that point, retail sales fell significantly more than expected in January, down 0.9% month over month, the worst reading since January 2024. While much of the impact was attributed to a cold snap across the country combined with the California wildfires, the size of the decline suggests broader weakness as consumers adjust to both higher prices and borrowing costs.
With firms making up three-quarters of the S&P 500 Index’s market capitalization having reported results, earnings-per-share are on track to jump 12.5% compared with an anticipated 7.3% before the season kicked off, according to Bloomberg. That’s well above the average 5.5% increase posted since the first quarter of 2022. But while U.S. companies are easily on track to double their earnings hurdles, a lower beat rate and sky-high investor expectations for the dominant Magnificent Seven are tripping up stocks as they hesitate around these all-time highs.
For all these reasons, I urge you once more to consider that is time to fall in love again with good portfolio management discipline like rebalancing and diversification. And on this very special day, please remember some wise words of famed investor Warren Buffet, “Money will not change how healthy you are or how many people love you.” With that, I send you my love and gratitude and best wishes for a healthy, happy weekend.
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