Weekly Market Insights 02.18.25

A Confusing Market Rally

Financial Markets

Equity markets rallied to near record levels last week, continuing a strong upward trend despite economic reports that could have given investors reason to hesitate.

This rally isn’t surprising given the broader market momentum. However, what stood out this time was the resilience of equities in light of data that might typically foster investor pessimism, notably a stronger-than-expected Consumer Price Index (CPI) inflation report. As we will discuss in the economics section, this moment warrants a closer examination of the underlying market dynamics.

Economics

A key driver behind the market’s strength has been the widespread expectation that the Federal Reserve will continue to lower interest rates, albeit more slowly than initially hoped. Interestingly, this creates a bit of a paradox. While lower rates generally support higher equity valuations, they also introduce the risk of liquidity-fueled inflationary pressures, which could ultimately prompt the Fed to reverse course. For now, the market remains highly sensitive to any signals from the Fed regarding the pace and extent of future rate cuts.

Another factor shaping investor sentiment is the wave of executive orders and policy actions coming from the White House since President Trump’s inauguration. Those related to tariffs are particularly interesting—especially on oil, which has unique implications for the U.S. economy and its trading partners.

Oil tariffs are a notable concern for several reasons. While the U.S. is a significant oil producer and a net exporter, it is not energy self-sufficient. It relies on imports to meet domestic demand for certain distillates. Due to the specific refining capability and costs in the U.S., the U.S. imports substantial volumes of heavy crude oil from Canada and Mexico to help meet this demand, and both countries are now targets for new tariffs. Given that energy prices influence nearly every sector, tariffs on oil could have widespread effects on inflation and consumer spending.

The administration’s policy direction remains fluid, and investors should pay close attention to further developments that could impact global trade, inflation, and market stability.

Conclusion

Despite ongoing uncertainty, the United States remains the dominant force in the global economy. While this letter is not meant to be bearish, it reminds investors to remain diligent. Market optimism persists, but as always, risks must be monitored closely.

Read pdf here.