Taking It All in Stride

By Crest Capital Advisors on February 18, 2025

Dow: 0.55% to 44,546.08
S&P 500: 1.47% to 6,114.63
Nasdaq: 2.58% to 20,026.77
Russell 2000: 0.01% to 2,279.98
Bitcoin: 97,725
10 Year Yield: 4.47%
Outperformers: Technology 3.76%, Communication Services 1.98%, Materials 1.75%
Underperformers: Healthcare (1.11%), Financials (0.08%)

Major US equity indices were higher this week, recouping some of last week’s modest losses. The Nasdaq outperformed with solid performances from “Big Tech,” a group that had been collectively lagging in the prior two weeks. Despite the mixed economic data and pushing out of Fed rate cut expectations to later in the year, US Treasuries were firmer for the week with yields finishing modestly lower. The US Dollar Index was down 1.2%, aiding multi-national earnings.

Investors processed several moving pieces this week with stocks ultimately moving higher. On the bullish side, we saw stocks supported by continued AI optimism, some interest rate reprieve with falling yields, a broadening in S&P earnings growth, and notably, some rumblings of the potential of a Ukraine War truce.

On the negative side, a “hotter” CPI report was a notable event for the week, but before getting carried away, we would caution that unusual historical January seasonality is a likely explanation. Perhaps this is why the market has so far remained very resilient. A lot of recent factors (Tariffs, DeepSeek headlines, and the aforementioned elevated CPI reading this week) could easily have catalyzed a correction for the headline averages. Instead, stocks have taken all of this in stride, and we find ourselves within an eyelash of the all-time S&P 500 reading as of the end of this week.

CPI Unpacked

This week’s major economic report (and subsequent pundit/media freakout) revolved around the release of the January Consumer Price Index (CPI). Here, the monthly rate showed a 0.5% increase (v. the 0.3% expected), and this moved the headline rate to 3.0% (from 2.9% expected). The Core CPI moved a bit more to 3.3% from 3.1% expected.

Take a look at the Cleveland Fed’s own New Tenant Rent Index. Does this look inflationary to you? Or maybe it really looks deflationary (which it is!!). And yet, the official CPI report says otherwise.

Source: Cleveland Fed, Bloomberg (February 2025)

Next up, we have those that hand wring over the so-called “Super Core” inflation data. But the majority of this super core reading is generated from changes in car insurance premiums. Of course we’re not saying that increased policy premiums are not painful to consumers, but we are still waiting for the Fed to explain to us how the level of interest rates dictates auto insurance premium prices! (Hint: It doesn’t)

So in conclusion, shelter and car Insurance is driving (no pun intended) the overall CPI right now. Fed rate hikes cause inflation through shelter. Car Insurance is not interest rate sensitive.

Bond Market Carnage

The drawdown in the bond market (due to a historic tightening period orchestrated by the Federal Reserve) has now reached a nearly unprecedented 4 ½ years (or 54 months) in duration. This is by far the longest and severest peak-to-trough drawdown of the last 50 years.

Long time CMD readers may recall when we wondered aloud during the period of zero and negative interest rates what the consequences of such a policy may ultimately be. Well, we likely have our answer in the table below.

Source: FactSet, Bloomberg, Crest Capital Research (February 2025)

How About “Up and to the Right”?

wo weeks ago, the big wonder was what would “Big-Tech” do about AI spending in the face of DeepSeek? Well, this great chart below from Yahoo Finance shows they are spending more than ever, we’re still projected to see CapEx spending up 46% year-over-year in 2025.

Earnings Season Update

With the fourth quarter reporting season more than 60% reported, both earnings and sales growth have been quite strong. EPS growth is now expected to be 14.8%, with 9 of the 11 sectors exceeding estimates from the start of the quarter. Sales growth is also expected to be strong overall with estimates sitting at 4.8%, with 9 of 11 sectors currently exceeding estimates from the beginning of the reporting season. While there is still 40% of the index left to report, there are few remaining that could really sway the EPS figure. It would be safe to say that Q4 will be yet another quarter of double digit growth.

Source: Strategas Research Partners (February 2025)

Economic Funnies

Crazy Stat(s) of the Week

According to SeekingAlpha, a ChatGPT query consumes nearly 10x more electricity than a Google search. Electricity demands from AI data centers are projected to increase power consumption by 160% over the next decade.

Despite all the media hysterics around this week’s January Consumer Price Index (CPI), we see that CEOs surveyed by the Cleveland Fed expect CPI inflation of 3.2% over the coming year, the lowest since Q2 2021 and equal to what firms expected at the end of 2018.

Source: Macrobond, Federal Reserve Bank of Cleveland (February 2025)

Quote of the Week

“If the economy remains strong and inflation does not continue to move sustainably toward 2 percent, we can maintain policy restraint for longer. If the labor market were to weaken unexpectedly or inflation were to fall more quickly than anticipated, we can ease policy accordingly.”

– Jerome Powell

Calendar of Events to Watch for the Week of February 17th

It will be a holiday shortened week as US markets are closed for the President’s Day Holiday on Monday. From there, we will continue to see heavy earnings activity driving sentiment for the remainder of the week. The US Economic Calendar features Empire Manufacturing Tuesday, Weekly Jobless Claims, and Leading Indicators Thursday, and we wrap the week with Manufacturing/Services PMIs. All in all, a fairly quiet week from an economic reporting point of view, but we still expect plenty of volatility as the White House continues to roll out various initiatives with broad market implications.

Monday 2/17 – US Markets will be closed in observation of Presidents Day.

Tuesday 2/18 – The Empire State Index for February is expected to improve, but remain in contraction, at -1.0 v. last month’s -12.6.

Wednesday 2/19 – The minutes from the latest Fed Open Market Committee (FOMC) meeting will be released. Expect plenty of scrutiny as to any clues around what the committee needs to see before resuming rate cuts. Housing Starts and Building Permits for January are both expected to post monthly declines as high interest rates put a dampener on new building activity.

Thursday 2/20 – The weekly jobless claims data will be scrutinized for any signs of labor market softness that could cause the Fed to focus on the other ½ of its dual mandate. On the economic front, the Philly Fed Index is expected to come in at 20.0 v. 44.3 last time around.

Friday 2/21 – The preliminary Markit Manufacturing and Services PMIs are expected to show roughly in-line with the prior month. Manufacturing is expected to remain slightly in expansion territory at 50.7 v. 51.2 last month. Services are expected to remain elevated at 53.5, up from 52.9 last month.

Source: MarketWatch / FactSet (February 2025)

Crest Capital Advisors is a group comprised of investment professionals registered with Hightower Advisors, LLC, an SEC registered investment adviser. Some investment professionals may also be registered with Hightower Securities, LLC (member FINRA and SIPC). Advisory services are offered through Hightower Advisors, LLC. Securities are offered through Hightower Securities, LLC.

This is not an offer to buy or sell securities, nor should anything contained herein be construed as a recommendation or advice of any kind. Consult with an appropriately credentialed professional before making any financial, investment, tax or legal decision. No investment process is free of risk, and there is no guarantee that any investment process or investment opportunities will be profitable or suitable for all investors. Past performance is neither indicative nor a guarantee of future results. You cannot invest directly in an index.

These materials were created for informational purposes only; the opinions and positions stated are those of the author(s) and are not necessarily the official opinion or position of Hightower Advisors, LLC or its affiliates (“Hightower”). Any examples used are for illustrative purposes only and based on generic assumptions. All data or other information referenced is from sources believed to be reliable but not independently verified. Information provided is as of the date referenced and is subject to change without notice. Hightower assumes no liability for any action made or taken in reliance on or relating in any way to this information. Hightower makes no representations or warranties, express or implied, as to the accuracy or completeness of the information, for statements or errors or omissions, or results obtained from the use of this information. References to any person, organization, or the inclusion of external hyperlinks does not constitute endorsement (or guarantee of accuracy or safety) by Hightower of any such person, organization or linked website or the information, products or services contained therein.

Click here for definitions of and disclosures specific to commonly used terms.