Economy
In January, the U.S. economy continued its impressive run of solid growth and declining inflation. Fourth quarter 2024 GDP growth came in at 2.3% despite a significant drag of 0.9% from liquidating business inventories. The U.S. consumer was particularly strong, with consumption rising at a 4.2% pace. As for the potential for government spending cuts to derail the U.S. post-pandemic expansion, even if 10% of Federal employees resigned, this would reduce Federal compensation costs by only up to $25bn/yr, or slightly less than 0.1% of GDP. Federal government spending comprises about 23% of GDP today, but a surprisingly small amount of that spending is tied to actual salaries. To be sure, the broader payments pause that the Administration threatened last week affected payments up to around $600bn or 2% of GDP. But that spending pause program was indeed paused later by a federal judge. Overall, on growth, we believe the current strength we are seeing does not point to a renewed risk of labor market overheating, and thus, the Fed is not likely to take a restrictive policy stance anytime soon.
To be sure, the Fed telegraphed its hawkish tilt back at its December meeting, but the January meeting provided confirmation that the central bank is just on a pause in its rate-cutting cycle. We still expect the FOMC will eventually resume cutting rates because it has indicated that its current monetary policy is ‘meaningfully restrictive,’ and we believe decelerating inflation over the next 6 months will give the central bank room to bring rates back towards four and eventually 3.5% sometime next year. We think a 25bp cut in June’s possible. However, we also recognize that the Fed has explicitly indicated that it is not in a hurry to cut rates now as it waits to see what economic impact new administration policies may have on growth and inflation.
Markets
U.S. markets closed down on the final trading day of the month after news of impending tariffs sparked renewed market jitters. It was a rollercoaster January, characterized by another all-time closing high for the S&P 500®, followed by a sharp selloff after a new AI model from China sent shockwaves through the world. Nevertheless, thanks to relatively strong earnings results and robust consumer spending, the S&P 500® remained resilient, concluding the month with a 3% gain. U.S. mid and small-caps outperformed their large-cap peers, with mid and small-caps up 4% and 3%, respectively. Concerns surrounding Fed rate cut uncertainty and inflation continued to weigh on investors, causing significant mid-month volatility. Most sectors eventually posted gains, led by communication services, health care, and financials. Information technology was the only laggard, down 3% due to AI-related headwinds. Turning to international equities, Europe and Japanese stocks finally outperformed the U.S. due to a rally in foreign cyclical stocks, namely banks in the second half of the month. All major fixed income indices posted gains. Tailwinds included a decline in 10-year Treasury yields during the second half of the month, exacerbated by the flight to safety trade during the end-of-the-month market turmoil.
As for the Magnificent 7, their outperformance of 2024 abruptly reversed in January. The group accounted for an incredible 53.1% of the 2024 S&P 500 total return of 25%, which meant that without the Magnificent 7 the rest of the 493 stocks return would have been 11.75%. In fact, the Mag 7 as a group declined in January. Much of their underperformance occurred on the final week of the month when news reports that the private Chinese AI startup DeepSeek introduced a chatbot that had matched or outperformed major U.S. AI leaders like Anthropic, Meta Platforms, Microsoft, and OpenAI. The accomplishment raised questions about current and expected U.S. global technology dominance, as well as the cost of development in the U.S., with leading AI companies committing USD 500 billion to future AI projects this month. Despite the initial sell-off, most tech mega-caps had recovered their losses by the first week in February.
Residential Property Insurance
The January Santa Ana sparked fires in Los Angeles were absolutely horrendous. The Eaton fire in Altadena destroyed over 6,000 homes plus another 3,000 structures. The Palisades fire took out another 6,800. The estimated cost of rebuilding is in excess of $200 billion.
Are you properly covered under our property and casualty insurance or are you underinsured? After Colorado’s Marshal Fire in 2021, a roughly $2 billion disaster, an estimated three-fourths of victims discovered they were underinsured.
To understand where you stand, you can google the cost per square foot to rebuild in your zip code, but I found this to be wildly inaccurate. The national price to rebuild (per Google’s AI) ranges between $100 and $500 a square foot. If one lives in California, these rates are higher, especially in the San Francisco Bay Area and Los Angeles.
I have contacted the property and casualty insurance company I hired to have this discussion, and I recommend that you all do this too. If a local insurance agent serves you, this local agency should have the data too. Please feel free to reach out to us to discuss this at any time.
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