Back-and-Forth February Financial Markets

Traditions Wealth Advisors
Greysen Golgert/Brien L. Smith CFP®
Economic Analyst Intern/Chief Investment Officer
February 27, 2025

It has been a back-and-forth February for financial markets. First, it is important to note that equities volatility has historically been higher in the year following an election in which the incumbent party loses. A change in administration naturally creates uncertainty for investors and can muddy up the macroeconomic models that economists use to anticipate growth or inflation metrics. That said, the headwinds financial markets have faced this month are not solely related to uncertainty within the domestic political sphere. Sticky inflation, major geopolitical changes, and technological innovations have all been complicit in providing minor shocks to stocks this February. Corporate earnings continue to buoy the equities markets, as 74% of companies managed to exceed their earnings estimates last quarter. The corporate earnings tailwind has persisted through January and February, but most firms have lowered earnings expectations for future periods because of uncertainty.
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The Trump Administration has hit the ground running. If anything, February has shown us that we should not expect business as usual from the executive branch or from President Trump. Tariffs, or the threat of tariffs, have been sending shockwaves around the world. As a tool for achieving foreign policy goals, President Trump is perfectly comfortable wielding the threat of tariffs against friend and foe alike. This spooks financial markets because trade wars stifle domestic growth and increase prices for the consumer. Thankfully—barring tariffs on Chinese goods that have already gone into effect—each tariff threat appears to be negotiable with the Trump Administration. Domestically, the Trump budget bill squeaked through the House of Representatives, and a government shutdown is unlikely at this point. As stated earlier, this administration is moving fast. The Department of Government Efficiency, or DOGE, has torn through red tape and flipped bureaucracy on its head in an attempt to reduce “government waste,” making news headlines every day. Regardless of opinions on DOGE or Elon Musk, the federal debt problem requires a solution, and spending less is a good place to start. Unfortunately, reducing labor costs is unlikely to put much of a dent in the ever-increasing federal deficit. A combination of severe spending cuts and increased government revenues is needed to begin making significant progress.

Fed officials are beginning to change their tune as it becomes clearer that they cut the Federal Funds Rate too hard and too fast. The last Consumer Price Index report surprised significantly to the upside, showing that prices increased by 0.5% in January and by 3% over the last 12 months. The Fed is likely to hold firm at the current 4.25-4.5% borrowing rate until the end of the year (barring significant shocks). The anticipated weakness in the labor market has not materialized and the unemployment rate is holding firm at 4%. Corporate and government layoffs might be making the headlines, but February’s Consumer Confidence Index survey (CCI) confirms the present strength of the current labor market. 83.7% of respondents said jobs are either mostly available right now (50.3%) or plentiful right now (33.4%), with the remaining 16.3% saying that jobs are hard to get right now. People are less optimistic about the state of the jobs market in 6 months, with 25.9% saying they believe there will be less jobs by then. Providing inflation refuses to make progress towards the 2% target rate, a persistently strong labor market could give the Fed the confidence it needs to reverse course and begin hiking rates again. Monetary policy is a key driver of the economy, and the cost of borrowing affects financial markets more than anything else does. If the Fed’s preferred inflation metric, the PCE index, confirms the inflation surprise, the interest rate will be going nowhere fast.

Sources:
Dolls-Deliberations-Weekly-Investment-Commentary_022425_FINAL.pdf
https://www.yardeniquicktakes.com/in-10-charts-consumer-confidence-jobs/
https://am.jpmorgan.com/us/en/asset-management/adv/insights/market-insights/market-updates/notes-on-the-week-ahead/the-growth-drag-from-policy-uncertainty/
https://www.troweprice.com/financial-intermediary/us/en/insights/articles/2024/q2/how-do-us-elections-affect-stock-market-performance.html