Investment Commentary | January 2025

January was nothing short of wild. As fires raged on the west coast, much of the country was plunged into deep cold, with record snowfall in Florida and the deep south. The market followed suit with AI concerns, earnings optimism, and new political leadership all coming together to shape the outlook for markets around the globe.

S&P 500 Hits New High

The S&P 500 returned 2.78% for the month after hitting a new all-time high in the month, but the ride wasn’t smooth. The market is still enjoying a backdrop of low unemployment, productivity gains, and solid consumer spending. Fourth quarter earnings for S&P companies were kick started with strong results in the financial sector, as big banks outperformed earnings expectations.

Ten of eleven sectors were positive for the month, reinforcing the idea that the market returns are broadening out from the magnificent seven stocks that have led over the past few years. Information Technology was the lone sector posting a loss for the month as concerns for the future path of AI are still being considered by investors. Communications, Health Care, and Financials led the index higher posting gains of 9.12%, 6.79%, and 6.56%, respectively.

AI Disruption Sparks Market Volatility

Along with disappointing earnings and future guidance from some of the big tech companies, the future of AI came into question, dragging down the sector and overall market. The announcement of a new, cheaper AI alternative, launched by Chinese company DeepSeek, knocked the market down with semiconductor stocks getting hit hard. Although, there was some bounce back from the likes of Broadcom and Nvidia, it wasn’t enough to offset the 15% – 20% of one day loss both suffered after the announcement from DeepSeek. The arrival of a new competitor raises several questions such as, how could a one-year-old company build a version of AI that rivals Silicon Valley for around $6 million?

Regardless of the answer to the questions surrounding DeepSeek, the significant drop in market value after the announcement serves as a warning to investors that there is volatility in some of the best performing stocks over the previous few years.

Tariff Tensions: Potential Economic Impact and Market Reactions

An additional risk factor that caused a sell off at the end of the month was the announcement of 25% tariffs on Mexico and Canada, and an additional 10% on China. Retaliatory measures should be expected from these countries, leading to a potential trade war with increased costs likely to be passed on to consumers in each country.

It is difficult to understand the complete impact of tariffs, as consumers may react in different ways by substituting, delaying, or pulling purchases forward in attempts to lower costs. Some costs may be absorbed by companies that don’t have significant pricing power, eroding profits. The shift in policy, combined with immigration policy, may be inflationary in the short-term. This in turn could cause the Federal Reserve (Fed) to hold rates steady or consider raising rates to combat climbing prices.

Small and mid-sized US companies had a good run for the month, up 2.91% and 3.85% based on the S&P SmallCap 600 and MidCap 400 indexes. The changes in tariffs and immigration will have an impact on all companies, but the focus on US consumers combined with anticipated deregulation lifted these stocks for the month. Higher rates are more of a challenge for small companies than their larger peers, and the inability to pass price increases from tariffs or increased labor cost could prove challenging in the months ahead for these companies.

Global Markets Gain, but Trade War Threat Looms

Outside of the US, Foreign markets were positive. The S&P World index posted a gain of 3.92%, led by a 9.69% gain in Latin America. Tariffs will be a two-way street, crimping demand around the globe. A trade war may impact foreign economies more than ours due to the overwhelming role services play in our economy. China, Mexico, and Canada are more reliant on exporting manufactured goods and raw materials than the US. Europe has also been threatened with tariffs. This could push already fragile economies into difficult situations.

Fixed Income Edges Up

Fixed Income was up slightly in the month with the S&P Aggregate Bond Index up 0.66%. Although the Fed kept short-term rates unchanged at the January meeting, longer term rates, such as the 10-year treasury, dropped throughout the month. The inability to raise the debt ceiling takes pressure off the treasury market. Hope for cuts to government spending, combined with a flight to safety shortly after the DeepSeek announcement helped to push rates down and prices up.

Currently, the market does not anticipate another rate cut from the Fed until June. Low unemployment, solid wage gains, and aggregate hours worked all paint a picture of a healthy economy. The impact of interest rates from inflationary pressures resulting from a trade war and mass deportations will be closely monitored by market participants.

Precious Metals Shine as Safe-Haven Demand Surges

Gold and silver had a great month, with the S&P GSCI Precious Metals index returning 7%. Demand for safe haven assets will likely continue due to geopolitical tensions around the globe. Government demand for gold has been strong over the past few years, a potential harbinger of risks yet to come. The appeal of safe assets that are not tied to a government has also driven the surge in demand from individual investors.

If January is a preview into 2025, then please buckle up. Some investors won’t mind taking a wild ride as long as they end up in positive territory like January. If you are concerned about market volatility, it is a great time to reassess the risk in your investment portfolio, and our team is always here to help.