Markets heated up in January as stocks, global equities, and precious metals rallied while AI spending, Federal Reserve uncertainty, and volatility raised caution.
The cold came and the leaves fell in early November, and it looked like the stock market was going to follow suit. The volatility that was missing in September and October found its way into the month. However, after a strong intramonth rebound, the S&P 500 returned 0.25%, led again by the Health Care sector, with a 9.31% gain for the month.
Tech Momentum Questioned Amid Broader Market Uncertainty
After posting the all-time high for the S&P 500 in late October, investors began second guessing the ability of the big tech companies to continue the momentum. Questions about AI being in a bubble and concerns regarding depreciation schedules potentially overstating income percolated through markets.
The longest government shutdown in history resulting in a lack of economic data also gave investors reasons to be concerned. Interest rate increases in Japan, and rumors of a decision on a new Federal Reserve Chair contributed to markets anxiety.
Yet again, the markets looked past all the concerns to post a nice rebound from the November 20th low, buoyed by strong earnings, a decrease in 10-year rates, and increased odds of a third short-term rate cut for the year.
Google’s Gemini 3 Ups the Ante in the AI Race
The AI race is staying hot, and Google’s latest entry with Gemini 3 sent markets into a bit of a spin. Google was able to produce AI that rivals ChatGPT and others but did so on their own chips.
We wrote earlier this year that the biggest threat to the big tech companies may be each other. Then the winds shifted due to the cost associated with AI, rivals started to band together and invest in each other. Google is not ready to be friends with rivals, showing that they can go alone. This will continue to capture investors’ attention, as the AI race shows no signs of slowing.
Small and Mid-Cap Stocks Lag Behind
Small and Mid-Cap US markets fared better than the large companies. The S&P MidCap 400 and S&P SmallCap 600 were both positive for the month, returning 2.05% and 2.65%, respectively. While these markets followed the same general path through the month as the larger companies the recovery was stronger. The valuations in these markets are lower, which also provides better odds for future returns.
International Markets Continue to Outperform
Outside the US, Developed and Emerging Markets were mixed, with S&P Developed Ex-US Broad Market Index (BMI) up 0.01%, and the S&P Emerging BMI declining -1.69% for the month. Investors have been keen on countries such as South Korea, Greece, Spain, and Peru. Further weakness in the dollar, trade deals, and domestic investment could continue to propel these markets.
Fixed Income Sees Continued Strength—But Headwinds Loom
Fixed Income had another positive month, with the S&P US Aggregate Bond Index up 0.66% for the second month in a row. Bonds have now returned more than 7.3% for the year. Additional rate cuts, and a sustained drop in long term rates can keep the positive momentum going, but there are head winds.
The size of the debt and continued borrowing will continue to pressure rates to the upside. The nomination of the new Federal Reserve Chair could roil bond markets globally. The Supreme Court decision on tariffs also has potential to spike rates higher. The administration has plans to keep as much of the tariff revenue coming in by different means if they lose the case.
The rise in Japanese bond yields is also problematic. For years investors borrowed in low-cost Yen and invested in other countries. Also, Japan has been one of the largest holders of US Treasuries for decades. With rates in Japan climbing, US assets may not be as attractive going forward.
Precious Metals Shine Amid Global Uncertainty
Precious Metals continued their remarkable run, with the S&P GSCI Precious Metals index up 6.92% for the month. While this has been great for investor portfolios as a hedge against risk and paper currencies, it also continues to signal that things may not be the same going forward as they have been for the last several decades.
The days are cold, and the leaves are down, but the markets are up, and the returns are hot. Just in time for Santa to come!
Investment Commentary by Jason Flores, CFA, CAIA – Executive Vice President & Chief Investment Officer at Central Trust Company.
At Central Trust Company, we continue to reassess the rapidly changing investment landscape for both risks and opportunities. If you would like to access our full monthly outlook and additional investment commentary, visit our Investments Learning Center. As always, if you have questions or concerns, please contact your Central Trust Company team. We are always ready to help.
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