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FED Says: Wait and See

by Fortem Financial February 3, 2025

Following 100 basis points in rate cuts through the back half of 2024, the Fed started 2025 with a pause, placing itself in wait and see mode for the foreseeable future.

Starting with today’s FOMC statement, there were a few language changes worthy of note. On the employment front, prior comments that labor market conditions have eased and the unemployment rate has risen, now state that the unemployment rate has stabilized and labor market conditions “remain solid.” With regards to inflation, the FOMC removed language that noted “progress towards the Committee’s 2 percent objective” and now simply state that inflation “remains somewhat elevated.” Both suggest more hawkishness, or at least less dovish news.

If there was one consistent theme Powell himself stressed throughout his press conference, it’s that the Fed believes their current policy stance is well positioned to respond if and when the data demand it. If the employment situation unexpectedly weakens, they stand ready to cut, but likewise they stand confident that keeping rates at current levels is enough to put continued pressure on inflation towards their 2 percent target.

It’s worth noting that the FOMC previously expressed confidence in their policy stance back in 2020 when they felt any rise in prices from massive government stimulus would be “transitory”. They also felt confident when they acknowledged that inflation wasn’t so transitory but forecast a modest pace of rate hikes would have inflation back down to 2 percent by the time 2024 was out. Yet here we stand, continuing an inflation fight that has stalled above target, despite rate hikes that went well past forecasted levels.

And now a new battle in Washington has begun. From tax cuts and deregulation which stand to boost businesses, to a clamping down on government excess which could temporarily slow the outsized deficit spending that has propped up economic growth. We may experience pain before the gain, as the economy moves to more sustainable footing. Along the way, the Fed is likely to spend much of this year reactively, though their guideposts have proven less than reliable.

What will we be watching? If M2 growth remains modest, both inflation and economic growth will slow, and the Fed will have room to continue cuts. If, however, rate cuts (or movements by the Treasury to draw down their checking account at the Fed and put that money back into the economy) lead to a rapid rise in M2 growth, the Fed has shown an active neglect of the warning signs that would have preempted the inflation debacle to begin with.

Source: Brian S. Wesbury, Chief Economist, Robert Stein, Deputy Chief Economist First Trust

 

Speaking of Tariffs

"Tariffs are likely more impactful to the economy overall than they are to S&P 500 revenues all else equal. The knock-on effects will also play a bigger role."

Mentions of Tariffs Ramping up on Company Transcripts

With reporting season in full swing and tariffs in the news on a daily basis, the mentions of tariffs in company transcripts are quickly ramping up to the 2018/2019 levels. With implementation of new tariffs during the reporting season we suspect that analyst questions will evolve around the implications for CY '25 guidance. Similar to 2018/2019, the sector with the most mentions of tariffs is Industrials.

About 7% of S&P Revenue is Derived From Canada, Mexico & China

Of the roughly $16.5 trillion in sales the S&P 500 does on an annual basis we estimate that about $1.1 trillion is derived from Canada, Mexico and China, with China accounting for the largest share. The industries most exposed to China from a dollar perspective are Autos, Tech Hardware and Semis. For both Canada and Mexico, Consumer Staples distribution & Retail are the most exposed. Furthermore, S&P companies within the Oil GAs & Consumable Fuels industry are also vulnerable. Perhaps the biggest takeaway is that tariffs are likely more impactful to the economy overall than they are to S&P 500 revenues all else equal. The knock-on effects will also play a bigger role.

 

Estimated Percentage of S&P 500 Revenue Derived for Tariffed Countries

Source: Strategas

 

Market and Index Changes for the Week Ending 1/31/2025

Chart reflects price changes, not total return. Because it does not include dividends or splits, it should not be used to benchmark performance of specific investments. Data provided by Refinitiv.

 

Sincerely,

Fortem Financial
(760) 206-8500
team@fortemfin.com

 

 

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The Five Star Wealth Manager award is based on 10 eligibility and evaluation criteria: 1) Credentialed as an investment advisory representative (IAR) or a registered investment advisor; 2) Actively employed as a credentialed professional in the financial services industry for a minimum of five years; 3) Favorable regulatory and complaint history review; 4) Fulfilled their firm review based on internal firm standards; 5) Accepting new clients; 6) One-year client retention rate; 7) Five-year client retention rate; 8) Non-institutionalized discretionary and/or non-discretionary client assets administered; 9) Number of client households served; and 10) Educational and professional designations. The inclusion of a wealth manager on the Five Star Wealth Manager list should not be construed as an endorsement of the wealth manager by Five Star Professional or the magazine. The award methodology does not evaluate the quality of services provided. Additional information about this award is available at: fivestarprofessional.com/2016FiveStarWealthManagerMethodology.pdf
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Data Sources: News items are based on reports from multiple commonly available international news sources (i.e. wire services) and are independently verified when necessary with secondary sources such as government agencies, corporate press releases, or trade organizations. Market Data: Based on reported data in WSJ Market Data Center (indexes); U.S. Treasury (Treasury Yields); U.S. Energy Information Administration/Bloomberg.com Market Data (oil spot price, WTI Cushing, OK); www.goldprice.org (spot gold/silver); Oanda/FX Street (currency exchange rates). All information is based on sources deemed reliable, but no warranty or guarantee is made as to its accuracy or completeness.

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