January started off 2025 on a positive note with all indices ending in the black. Investor cash sloshed around, moving out of Large-Cap equities while adding to Small-Caps, especially in Healthcare. The Financial and Consumer Discretionary sectors were also rewarded with investment.
Technology was hammered at the end of January as the news of China’s AI startup DeepSeek hit. Concerns over a less expensive open-source language model questions US dominance in the AI space race. The massive spending on the technology from the power players in Tech has been questioned. Stock prices were hit both for chip makers and software developers. As well, equity prices of power generators in the Industrials sector retreated in lock step.
The consensus is that if DeepSeek is as advertised, then spending on AI will continue to accelerate. Models then can be done more cheaply, broadening out the use of AI technology across multiple industries. We believe the selling is overdone.
S&P 500: Jan +2.70% DOW: Jan +4.70%
NASDAQ: Jan +1.64% Russell 2000: Jan +2.60%
Sector Performance for January:
Communication Services +9.0%
Consumer Discretionary +4.4%
Consumer Staples +1.9%
Energy +2.0%
Financials +6.4%
Healthcare +6.6%
Industrials +5.0%
Technology -2.9%
Materials +5.5%
Real Estate +1.7%
Utilities +2.9%
Current U.S. Treasury Yields:
6 Month Bill 4.31%
2 Year Note 4.27%
5 Year Note 4.35%
10 Year Note 4.50%
30 Year Note 4.70%
The Economy and the Fed:
Fed Chair Powell left the Fed Funds Rate unchanged at 4.25%–4.50%. Inflation remains close to 3% and Powell stated, “Longer-term inflation expectations appear to remain well-anchored.” Powell believes the economy is in a good place and is in no hurry to cut. Real GDP printed at 2.3% in Q4 2024. It reflected increases in government and consumer spending and decreases in investment and imports.
The market is pricing in second half rate cuts, but the Fed continues to be data dependent. Inflation rose 2.9% in December year-over-year. JOLTS reported that job openings decreased to 7.6 million in December, lower than the 8 million forecasted and the lowest since September.
Thus far corporate earnings have surprised to the upside, up 17% YOY, above the 13.2% estimated. The results are still early in the reporting cycle with many companies yet to print. We’re encouraged thus far.
Looking Ahead:
Tariffs clearly are a Trump bargaining chip. It remains to be seen where all of the rhetoric ends up. Focusing on individual company earnings and forward guidance still remain our guideposts. We are witnessing the market continue to broaden out. Cash on hand is still earning over 4% and is ready to deploy where we feel appropriate. It also mutes market volatility in client portfolios.
Financials and Healthcare should benefit in 2025. Consumer Discretionary is still quite strong and we don’t see consumer spending abating anytime soon. Technology will continue to be an important driver of market performance. The fixed income market has been fairly steady helping to support equities.
This is still a bull market. There will be volatility. Stock picking is key. Barring any global macroeconomic meltdown, massive trade wars, or new military skirmishes we remain positive and upbeat on the market for 2025.