Economy
In February 2025, the U.S. economy exhibited steady non-inflationary growth despite rising political uncertainty and back-to-back weak consumer sentiment readings that pointed to much higher inflation expectations. Furthermore, the labor market showed signs of cooling, as job growth slowed to 143,000 in January, down from 307,000 in December and 261,000 in November. Despite the slowdown, the unemployment rate edged lower to 4.0%, suggesting the job market remains relatively tight.
On the growth front, GDP expanded at an annualized rate of 2.3% in Q4 2024, matching expectations. But personal spending for January came in weaker than expected, and the trade deficit expanded, suggesting that growth in the 1st quarter could come in at less than 2%, a substantial slowdown from the 4th quarter rate. It is possible that one-time factors like a surge in gold imports and bad weather and wildfires impacted the numbers and that growth should bounce back in the 2nd quarter. Inflation remains a key focus, with the Fed’s preferred measure, the PCE price index, rising 2.6% year-over-year in December—down from 2.7% a month prior and well below the 7.2% peak seen in mid-2022 and generally in line with forecasts.
While the Federal Reserve did not hold a policy meeting in February, central bank officials remained active in commenting on the monetary policy outlook. Most notably, Fed Chair Jerome Powell delivered his Semiannual Monetary Policy Report to Congress, reinforcing the Fed’s commitment to sustaining economic growth while ensuring inflation returns to its 2% target over time. The Fed’s latest Monetary Policy Report underscored that while inflation has eased, it remains above that 2% target, keeping investors on edge about the timing of potential rate moves later this year.
Overall, the economic landscape remains steady, with moderating inflation, solid GDP growth, and a cooling but still resilient labor market. However, uncertainty around trade policy, inflation, weak consumer spending in January, and Federal Reserve actions will likely keep markets volatile in the months ahead.
Markets
U.S. equity markets were buffeted by several headwinds in February, including potential impending tariffs, geopolitical tensions, emerging economic weakness, and a decline in consumer confidence, with the S&P 500 closing the month down 1.3%. Despite reaching two all-time closing highs, gains were quickly erased, followed by a rally for the S&P 500 on the final trading day of the month. Mid and small caps fared worse than their large-cap peers, with the S&P Mid Cap 400 and S&P Small Cap 600 falling 4% and 6%, respectively. Heightened inflation concerns and uncertainty regarding potential Federal Reserve rate cuts continued to weigh on investor sentiment. Sector performance in February was mixed. Defensive sectors outperformed, led by Consumer Staples and Real Estate, while Industrials, Communication Services, and Consumer Discretionary lagged.
Perhaps the most notable theme to emerge in February, and indeed so far this year, has been the return of international diversification as a viable investment strategy. For years, investing in US Technology, and even just the biggest of the Mega-cap Tech stocks, reliably delivered the best returns. But for February, such a strategy failed to deliver. The S&P 500 lost 1.3 % for the month, and all but two of the Magnificent 7 stocks lost more than that. Tesla, for example, was down more than 25% in February. Conversely, the year-to-date global winners are largely from Europe and emerging markets as countries from Korea to China to Mexico and to Italy are up between 8 and 14%. It is certainly possible that this is just the markets reacting and correcting oversold conditions at the end of last year in the wake of the US elections and consequent fears about the ramifications of US tariffs. For the outperformance to be sustainable going forward, investors will need to see confirmation that earnings in these markets are indeed starting to pick up and challenge US companies. Signs of earnings acceleration in Europe, in particular, are emerging but are far from certain. If they do fail to materialize, this international revanchism may indeed be short-lived
529s and direct payments for tuition
Although Congress created 529s through legislation in 1996, 529s plans are managed by each state. I mention this fact because I recently received a question on the maximum amount one could contribute to their 529 plan for their children. The maximum amounts range from $235,000 to over $550,000. For 2025, California’s max limit is now $529,000, Texas is $500,000, and Tennessee is $350,000. These max limits are important to pay attention to due to the ability to use 529s for primary and secondary private school education in many states and the ability to use excess 529s to fund Roth IRA accounts.
However, Congress did impose limits. For primary and secondary education, the 2017 Tax Act limited the amounts to $10,000 annually. It is also important to check with your respective state to see if it has any unique rules, as not all states allow for 529s to be used for private primary and secondary education. Regarding 529s to Roth IRAs, your child must be at least 18 years old, needs to be working, and is limited to the annual contribution limit any taxpayer can make, which is currently $7,000. Please note that if your college-aged young adult only earns $4,000, then you would be limited to $4,000 from the 529 to Roth IRA. Additionally, $35,000 is the lifetime maximum that can be transferred from the 529 to a Roth IRA.
It is also important not to overlook the power of having a grandparent directly pay their grandchildren’s education expenses. These are not considered gifts. Therefore, a grandparent can gift a grandchild $19,000 and directly pay for a private high school tuition of $30,000. We would only recommend this strategy if your financial plan demonstrates that this is possible and is not detrimental to your lifestyle.
A comprehensive paper on 529s and gifting would fill many pages. I only show a few highlights here. We are happy to discuss these with you at any time.
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