Our five takeaways from the start of the year:
- Markets Rally in January
- Markets rebounded in January after mixed results in December.
- Bonds Rise as Interest Rates Fall
- Falling long-term interest rates caused bonds to rise.
- Healthy Economic Backdrop
- The economic updates released in January showed continued healthy economic growth.
- Risks Ahead
- Investors should prepare for potential risks ahead.
- Solid Outlook Despite Policy Uncertainty
- We believe the most likely path forward is for continued market appreciation and economic growth.
Markets Rally in January
Investors experienced a solid start of the year last month as the U.S. stock and bond markets rallied on improving fundamentals and a strong economic backdrop. The S&P 500 gained 2.78% for the month while the Dow Jones Industrial Average rose 4.78%. Technology stocks faced headwinds during the month; however, the Nasdaq Composite still managed to gain 1.66% in January. Per Bloomberg Intelligence, the average earnings growth rate for the S&P 500 in the fourth quarter as of February 3 was 10.1%. This is well above analyst estimates at the start of earnings season for a more modest 7.3% increase.
The story was similar for international stocks during the month. The MSCI EAFE Index rose 5.26% in January while the MSCI Emerging Markets Index was up 1.81%. Both developed and emerging markets were supported by a weakening dollar in January.
The bond market also rebounded to start the year, with falling rates supporting bond prices. The 10-year U.S. Treasury yield fell from a high of 4.79% mid-month down to 4.58% at month-end. The Bloomberg U.S. Aggregate Bond Index gained 0.53 percent for the month. The Federal Reserve met in January and decided to keep short-term interest rates unchanged at the conclusion of its meeting. This decision was widely expected by investors and economists following three consecutive meetings with rate cuts.
January Inflation Changes the Landscape
January’s month consumer price index (CPI), which was released by the Bureau of Labor Statistics in mid-February, showed a strong and unexpected uptick in consumer inflation. The month-over- increased by 0.5% when market analysts expected an increase of only 0.3%. This sharp increase pushed the 12-month CPI to 3%, which is the highest level reported since June 2024.
The uptick in inflation has far-reaching implications. While the market was looking for easing inflation, giving the Fed reason to cut interest rates in the near term, that certainly is not the case here. CME FedWatch Tool now estimates that the Fed will not cut interest rates until their September meeting at the earliest.
Our Perspective
Strong corporate earnings are expected to continue in spite of the ongoing threats of tariffs, especially with Canada, Mexica, and China. A growing number of market analysts see the threat of tariffs as a geopolitical economic bargaining tool rather than an economic policy. Value stocks are beginning to perform well, better than growth stocks in January. This, too, may well continue given the recent gains in energy and financial stocks. That said, we will continue to maintain our overweight positions in large cap stocks.
The bond market started off fairly strong in January but may face headwinds going forward. We are revisiting our fixed income positions with an eye on non-traditional bond holdings. These include other financial instruments such as futures and forward contracts, as well as currencies. We will maintain our current holdings in intermediate-term investment grade bolds, albeit in somewhat reduced allocations.
If you have questions or would like to discuss any of the above, please do not hesitate to contact our office at (831) 422-4910.