
The Week in Charts (1/20/25)
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The most important charts and themes in markets and investing…
1) Why a Fed Pause is Coming
The US inflation rate continued its upward climb in December, with overall CPI rising to 2.9%.

That was the highest reading since last July, moving again in the opposite direction of the Fed’s 2% target. Since January 2020, CPI has increased at a rate of 4.2% per year, with the gap between actual inflation and the 2% trendline continuing to widen.

Core CPI, which excludes the more volatile Food and Energy categories, increased 3.25%. That was the 44th consecutive month above 3%, the longest period of elevated inflation in the US since the early 1990s.

Producer prices are on the rise as well, with the latest PPI report showing a 3% year-over-year increase. That was the the highest reading since February 2023.

The mounting evidence of rising inflation is becoming more difficult to dismiss, and the market is now firmly saying the Fed will pause when it meets next week with a 99.5% probability priced in. Which means that a pause is indeed coming, for the Fed has done exactly what the market was expecting it to do ahead of every single meeting since 2009.

After that, a slower pace of easing is expected with one to two rate cuts priced in for all of 2025. But these expectations will change with every single data point. If inflation comes in higher than expected and the economy remains on solid footing, we could see interest rates remain higher for longer. And if inflation moves down to 2% and/or economic weakness presents itself, we would likely see more aggressive easing by the Fed.

2) 48 Straight Months of Jobs Growth
256,000 jobs were added in December, well above the consensus estimate of 157,000. This was the 48th consecutive month of jobs growth in the US, tied for the 2nd longest streak in history.


The US Unemployment Rate moved down to 4.1% in December from 4.2% in November and remains well below the historical average of 5.7%.

Where are the new jobs coming from? Here’s a breakdown by industry over the past 3 months…

3) Living in the Outlier
The Nasdaq 100 has closed above its 200-day moving average for 466 consecutive trading days, the 2nd longest uptrend in its history. The index has gained 88% during this incredibly smooth run.


Driving these returns have been the Magnificent Seven stocks, whose importance to global investors continues to increase. Apple, Nvidia, and Microsoft now each have a higher weighting in the global equity market than every country outside the US except for Japan.

And the 18.6% combined weighting of the Magnificent Seven in the global equity market is more than the entire weighting of Japan, the UK, China, Canada and India … combined.

4) What Will the Deficit Be in a Year?
The US Federal Budget Deficit ended 2024 at over $2 trillion, following deficits of $1.8 trillion in 2023, $1.4 trillion in 2022, $2.6 trillion in 2021, and $3.3 trillion in 2020.

What will the deficit be in a year?
Hopefully lower than it is today, but judging by the results of a recent poll I ran on X, there are many who don’t believe we will see any progress (41% said the deficit will remain above $2 trillion).

As the national debt continues to pile up and interest rates remain elevated, we’re seeing a troubling trend continue…
The Interest Expense on US National Debt rose to a record $1.15 trillion last year, an increase of 97% over the past 3 years. The US Government now spends more money on interest than it does on National Defense.

5) Are Bonds Still a Good Diversifier?
The correlation between US stocks and bonds over the last 3 years (0.73) was the highest on record.

Which is leading many to ask the question: are bonds still a good diversifier?
The answer to that depends in part on whether you believe the main concern among investors will continue to be inflation, as was the case over the past three years.
For if it is, corrections in stocks will often coincide with rising interest rates and inflation expectations, meaning bonds will sell off at the same time.
But predicting what investors will be fearful of is an impossible task.
What we do know from history is that stock/bond correlations are neither static nor predictive. Which means that there’s no reason to believe they will remain this high going forward.
Additionally, the bond market is in a much better place today than it has been in a long time, with the highest year-end yield on the 10-year Treasury since 2006 (4.58%).

Why is that important? Because the single best predictor of future bond returns is the starting yield (97% correlation).

Back in 2020 that yield was less than 1%, predicting the lowest future bond returns on record. And that’s precisely what we’ve seen, with bonds having a negative return in the first half of the decade.

But investing is about the future, not the past. And with the 10-year yield now at 4.61%, the second half of the 2020s should be much brighter for bond investors.

6) Rising Real Wages
After a record 25 consecutive months of negative real wage growth, wages have now outpaced reported inflation on a YoY basis for 20 straight months. This is a great sign for the American worker that hopefully continues.

7) Spike in Small Business Optimism
Small Business Optimism has surged since the election and is now at its highest level since October 2018. The net percentage of owners in the NFIB survey who are expecting the economy to improve rose to 52%, the highest since 1983.

8) A Few Interesting Stats…
a) Sales volumes of US whiskey are down 4% over the past year, the largest decline in decades.

b) The wealthiest 10% of Americans live to a median age of 86 years, about 14 years longer than the least wealthy 10%.

d) The US spent a record $4.87 trillion on health care in 2023, 7.5% more than the prior year. That’s over $14,000 per person and the biggest percentage increase since 1990.

e) A record 771,480 people were reported homeless in the US in 2024, an 18% increase over 2023.

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The post The Week in Charts (1/20/25) appeared first on Charlie Bilello’s Blog.