January 2025 marked a positive yet volatile beginning for the markets as Trump returned to the White House. Several factors influenced the market's performance, including advancements in artificial intelligence (AI) and the Trump administration's announcement of new tariffs. The Federal Reserve opted to keep interest rates unchanged as they assessed the latest economic data.
Stock Market
AI-related stocks experienced significant fluctuations after a Chinese AI startup, DeepSeek, announced a breakthrough that rattled U.S. tech shares. Shares of the AI darling, NVIDIA, dropped over 20% in 3 days. Additionally, the announcement of tariffs on Canada, Mexico, and China added to market uncertainty. Despite this intra month volatility, the S&P 500 ended the month up 2.78%, with mid-cap and small-cap stocks up 3.85% and 2.91% respectively. Value stocks, which rose by 4.50%, outperformed growth stocks, which increased by 2.03%, as they were less affected by the AI-related rout. Globally, Foreign developed stocks had a great month, up 5.26% while emerging markets finished up 1.81%.
Interest Rates
In the bond market, U.S. Treasury yields were largely unchanged. The 10-year U.S. government bond yield rose to 4.8% before settling back to where it started the year at 4.6%. Short term rates remained unchanged at 4.25-4.50% coming out of the January FOMC meeting. It was a rather uneventful meeting and press conference. Fed Chair Powell indicated that the Fed is in no hurry to make changes as recent inflation readings have been good. The market is not anticipating another rate cut until June based on the latest CME FedWatch tool.
Economic Data
Turning to economic data, the December CPI inflation rate edged up to 2.9% from 2.7% the month prior. This marks the third consecutive monthly increase, however over 40% of this latest increase is attributed to energy. Excluding food and energy, “core” inflation rose 3.2%, down from last month’s 3.3%. It’s worth noting that December nonfarm payrolls came in much hotter than expected, with 256k jobs added compared to consensus estimates of 150k-160k, and the unemployment rate decreased to 4.1% from 4.0%.
Looking Ahead
February will mark the end of the Q4 2024 earnings season and bring additional economic data, including jobs, inflation, and GDP. With the Fed in a holding pattern, the focus may shift from broader macroeconomic trends to microeconomic details, though any fluctuations in the data could disrupt this. Investors will also be closely watching the implementation of the new administration’s policy decisions and potential retaliatory measures. Historically, February has been in the bottom third for monthly returns of the S&P 500 over the past 25 years, averaging -0.25%, but in 2024, it was the second-best performing month with a return of 5.34%, just behind November’s 5.87%.
