​The Markets
 
A difference of opinion.
 
Broadly speaking, there are two types of investors: individual investors and institutional investors.
 
Individual investors buy and sell investments to grow their personal wealth. This group of investors often works with financial advisors as they pursue their financial goals. Individual investors tend to invest smaller amounts of money than institutional investors do.
 
For the last three weeks, sentiment among individual investors has been leaning bearish. Last week, 40.5 percent of investors in the AAII Investor Sentiment Survey were feeling pessimistic about the direction of stocks over the next six months. That was an improvement from the prior week’s reading when 47.3 percent of participants were bearish. Here’s what the survey has found since the week of January 20.

​The AAII Investor Sentiment Survey is considered a contrarian indicator, meaning that people look at the survey to identify potential turning points in the market. In some instances, when investors have been pessimistic, the market has moved higher, and vice versa, reported Edward Harrison of Bloomberg.
 
Institutional investors are very large investors, such as banks, mutual funds, exchange traded funds, college endowments, state pensions, insurance companies, and other organizations that buy and sell investments, usually in very large volumes, to meet the goals of the group for whom they’re investing.
 
Currently, institutional investors are quite bullish. According to survey results released last week by Bank of America (BofA), many institutional investors are fully invested and holding very little cash. “Global stocks have become the most popular asset class with [institutional] investors, who are showing the biggest willingness to take risk in 15 years,” reported Sagarika Jaisinghani of Bloomberg. “About 89 [percent] of respondents in the BofA survey said US equities were overvalued, the most since at least April 2001. The faith in so-called U.S. exceptionalism — where investors bet mainly on American financial markets — has also faltered as investors rotate into European stocks.”
​
Last week, major U.S. stock indices moved lower on discouraging economic data and inflation concerns, reported Connor Smith of Barron’s. The yield on the benchmark 10-year U.S. Treasury moved lower over the week.

​The Markets
 
Why are stock markets wary of tariffs?
 
In two of the last three weeks, tariff announcements led to late week stock market sell-offs. Stocks quickly recovered lost value, but uncertainty about the administration’s trade policy and the potential impact of that policy on U.S. companies remained. That’s likely to be the case until it becomes clear whether the Trump administration sees tariffs as a negotiating tactic or a means to cover the cost of extending 2017 tax cuts.
 
If tariffs are a negotiating tactic and unlikely to be implemented, the effect on the U.S. economy, businesses, and stocks may be less significant than if tariffs are put in place. The Tax Foundation evaluated the administration’s proposal for a universal baseline tariff and reported, “the 10 percent tariff would generate $2 trillion of increased revenue, while the 20 percent tariff would generate $3.3 trillion over a decade.”
 
While increased tax revenue is alluring, the catch is that tariffs are taxes added to the prices of materials and goods purchased by American businesses. Often, the cost is passed on to consumers, reported Anshu Siripurapu and Noah Berman of the Council on Foreign Relations (CFR). As a result, the trillions of dollars that could be generated would come from American pockets. According to CFR estimates:
 
“A 25 percent tariff on Canada and Mexico will raise production costs for U.S. automakers, adding up to $3,000 to the price of some of the roughly sixteen million cars sold in the United States each year. Grocery costs could rise, too, as Mexico is the United States’ biggest source of fresh produce, supplying more than 60 percent of U.S. vegetable imports and nearly half of all fruit and nut imports.”
 
Higher prices may reduce demand for goods and services, slowing sales and reducing companies’ profits (and earnings). If earnings growth slows, publicly traded companies’ stock prices could be affected. David Kostin, chief U.S. equity strategist at Goldman Sachs Research reported, “...every five-percentage-point increase in the U.S. tariff rate is estimated to reduce [Standard & Poor’s 500 Index] earnings per share by roughly 1-2 [percent].” Goldman’s estimates suggest the 10 percent tariff placed on China in early February could raise the effective U.S. tariff rate by about 4.7 percentage points.
 
In addition, businesses may be vulnerable to retaliatory tariffs imposed by other nations. For example, “American farmers and ranchers incurred the most widespread damage from this retaliation following the 2018 tariffs. The damage was so great that the [first] Trump administration authorized $61 billion in emergency relief payments to cushion farmers and ranchers from the blow…an amount roughly equivalent to all of the tariff revenue collected from U.S. businesses,” reported Adam S. Hersh and Josh Bivens of The Economic Policy Institute.
 
Investors appeared to shrug off concerns about tariffs and trade wars last week. Denitsa Tsekova of Bloomberg reported, “This week’s vow for reciprocal tariffs comes not long after [President Trump] delayed threats against Canada and Mexico, signaling to many investors that he won’t take action that enacts lasting damage to Wall Street.”
 
Last week, higher than expected inflation numbers and weaker than expected retail sales data gave investors pause, but major U.S. stock indices finished the week higher. The yield on the benchmark 10-year U.S. Treasury moved lower over the week.

The Guidance Wealth Office will be closed on
Monday, February 17th, in observance of Presidents Day.
 
  
The Markets
 
Optimism headed south on Friday.
 
After rising for most of the week, stock markets lost momentum last Friday as economic data raised doubts about further Federal Reserve rate cuts, reported Rita Nazareth of Bloomberg. Late in the day, President Trump announced new tariffs would be imposed this week, and stocks dropped into negative territory.
 
Consumer Sentiment Fell Sharply
 
Last week, the University of Michigan Consumer Sentiment Index reported that consumer confidence, which tumbled four percent in January, fell another five percent in February.
 
“Consumer sentiment fell for the second straight month, dropping about 5 [percent] to reach its lowest reading since July 2024. The decrease was pervasive, with Republicans, Independents, and Democrats all posting sentiment declines from January, along with consumers across age and wealth groups. Furthermore, all five index components deteriorated this month, led by a 12 [percent] slide in buying conditions for durables, in part due to a perception that it may be too late to avoid the negative impact of tariff policy. Expectations for personal finances sank about 6 [percent] from last month, again seen across all political affiliations, reaching its lowest value since October 2023. Many consumers appear worried that high inflation will return within the next year,” wrote Surveys of Consumers Director Joanne Hsu.
 
Rising inflation could keep the Federal Reserve from lowering rates further. Survey participants expected prices to rise 4.3 percent over the next 12 months. That is a full point higher than in the previous month, when they anticipated prices would rise by 3.3 percent. Over the longer term, inflation expectations were steadier, rising from 3.2 percent to 3.3 percent.
 
Tariff Talk Took A Toll
 
In a Friday afternoon press conference, President Trump indicated he will implement reciprocal tariffs next week, although he did not specify which countries will be affected. “The tariffs would be the next volley in a trade war pitting the U.S. against some of its largest trading partners. Trump announced levies of 25 [percent] against Canadian and Mexican imports last weekend, though suspended them for a month after the countries agreed to increased border security and measures to reduce the flow of illegal drugs into the [United States]. A separate 10 percent tariff against Chinese imports went into effect, and China responded with tariffs of its own,” reported Joe Light of Barron’s.
 
Employment Remained Relatively Stable In January
 
The U.S. employment report showed hiring was solid in January, but less robust than expected, reported Lucia Mutikani of Reuters. The data showed “strong wage growth last month, with average hourly earnings surging by the most in five months, which should keep consumer spending supported.”
 
While a steady labor market was encouraging, investors have some concerns about the future, reported Megan Leonhardt of Barron’s. “Looking ahead, employment conditions could face more headwinds as federal policy changes take hold, and many economists expect to see further weakening within the U.S. labor market this year. The shifts in trade and immigration policies, in particular, could upend the relative stability currently on view in the labor market, as well as impede the downward progress inflation has made.”
 
On Friday, major United States stock indices gave back gains from earlier in the week and ended the week lower. The yield on the benchmark 10-year U.S. Treasury moved lower over the full week before rising on Friday.

​The Markets
 
Wait! What just happened?
 
Last week, investors were inundated with market-moving data and news. Stock markets gyrated as investors tried to process everything that was occurring. Here’s some of what happened:
 
China surprised the artificial intelligence industry
The week got off to a rough start with major United States stock indices declining sharply on concerns about competition from China in the artificial intelligence (AI) space. AI-related technology stocks sold off after a Chinese start up released a less expensive AI model, raising concerns that current tech stock valuations may be too rich, reported Rita Nazareth of Bloomberg. Over the course of the week, markets “clawed back most of those losses thanks to encouraging earnings and company strategy updates, and as some investors re-evaluated the risks U.S. firms face from Chinese competition,” reported Barron’s.
 
Companies performed well
Last week, fourth quarter earnings reports bolstered investor optimism. So far, 36 percent of the companies in the Standard & Poor’s (S&P) 500 Index have reported on fourth quarter earnings. Seventy-seven percent of those companies have reported earnings that exceeded estimates, reported John Butters of FactSet.  
 
Economic growth continued
In addition to upbeat earnings news, economic data released last week showed the U.S. economy continued to grow in the fourth quarter of 2024. “The [economic growth] figures cap another solid year for the world’s largest economy that defied expectations for a marked slowdown as consumers hung tough in the face of persistent inflation and high borrowing costs. The economy grew 2.8 [percent] in 2024 after expanding 2.9 [percent] and 2.5 [percent] in the prior two years, respectively,” reported Molly Smith of Bloomberg.
 
Inflation persisted
Last week’s inflation data was less encouraging. The Personal Consumption Expenditures Index, which is one of the Federal Reserve’s favored inflation measures, showed that headline inflation moved higher in December, rising to 2.6 percent annualized from 2.4 percent annualized in the previous month. Core inflation remained steady at 2.8 percent annualized.
 
The Federal Reserve paused
The Fed left rates unchanged last week. The range for the federal funds rate remained 4.25 percent to 4.50 percent. The accompanying statement said, “the risks to achieving [the Fed’s] employment and inflation goals are roughly in balance. The economic outlook is uncertain, and the Committee is attentive to the risks to both sides of its dual mandate.” Stocks moved lower initially but calmed after the Fed Chair offered assurances that monetary policy is well-positioned for whatever may be ahead, reported Caroline Valetkevitch of Reuters.
 
Uncertainty abounded
Government policy proposals arrived at a rapid pace, creating uncertainty. The White House Office of Management and Budget issued a memo temporarily pausing disbursement of government grants and loans, but no one was certain how the pause would affect the economy. “The federal government gives $1 trillion in grants to state and local governments alone, for everything from physical infrastructure and public safety to health and social services. Removing this money from the economy would represent a huge economic shock,” reported Samantha Sanders and Josh Bivens of the Economic Policy Institute. A federal judge temporarily blocked the freeze.
 
Tariffs threats loomed
Tariff talk had a more immediate effect on markets than the spending pause. U.S stocks slipped lower on Friday after the White House indicated it will move forward with tariffs on Canada, Mexico, and China, reported Connor Smith of Barron’s. “Investors are bracing for a looming hit to U.S. corporate profits and pressure on inflation if President Donald Trump makes good on his tariff threats, with markets seen as not fully factoring in risks from higher levies on foreign imports,” reported Laura Matthews, Lewis Krauskopf and Suzanne McGee of Reuters.
 
Investors had a lot to consider last week. As the dust settled and the exchanges closed for the week, the Dow Jones Industrial Average had recovered its losses and moved slightly higher. The S&P 500 and Nasdaq Composite Indices had regained some losses but ended the week lower. All three indices had gains over the full month, reported Lisa Kailai Han of CNBC. The yield on the benchmark 10-year U.S. Treasury fell sharply on Monday and moved higher over the week.