Key Points:
- 2025 is underway with stocks and bonds advancing higher to start the year.
- Markets are closely watching the tariff situation and the implications for global growth and inflation.
- International stocks had a good start to the year, outpacing returns in the US.
Stocks started the year a bit choppy as the market digested a host of new policies from the incoming Trump administration. The notion of tariffs on our largest trading partners created a level of uncertainty with investors around their impact on global growth, corporate profits and inflation. Despite the volatility in the market, stocks moved higher in January. The Dow Jones Industrial Average was up 4.8%, S&P500 gained 2.8%, while the tech-heavy NASDAQ advanced 1.7%. Technology stocks were the only negative sector of the market as a new emergent in the AI world appeared. Deepseek, a Chinese artificial intelligence startup, rocked US technology stocks as it appears to have developed an AI chat-bot model much cheaper and with less advanced chips. The market sold off with NVIDIA, an American semiconductor chip designer at the center of artificial intelligence, losing almost $600B in value in a single day. However, the market has proved resilient with all other sectors moving higher during the month. A broadening out of the market could be on the horizon as tech valuations may be stretched. The quick rebound in stocks days later suggest that perhaps some of the $7 Trillion parked in money market funds may be waiting for a market selloff.
Bonds are off to a good start with the Bloomberg US Aggregate Bond Index gaining 0.53% for the month. High yield bonds were up 1.36% while TIPS (inflation-linked bonds) moved higher as inflation worries grew. The Federal Reserve kept rates steady during their meeting in January after cutting the Fed Funds Rate 100 basis points (1%) in 2024. Unemployment has stabilized and the economy continues to grow. The US economy expanded 2.5% last year, which is above the long-term trend. Higher economic growth usually results in some level of inflation so the Fed will be taking a wait-and-see approach to inflation data before cutting rates (if at all) this year.
The next few months could prove to be volatile in the markets as tariffs, deregulation and future rate cuts impact the economy in different ways. Inflation could remain lumpy and may take more time to get to the Fed’s 2% target. Value stocks outperformed growth and international stocks moved higher in January for both developed and emerging markets. The MSCI EAFE Index gained 5.3% for the month with strong returns in Germany (+9.4%), Switzerland (+8.2%) and France (+8.1%). into stocks and bonds could be a tailwind for risk assets. Balanced investors are usually best served by sticking to their long-term asset allocations and avoid trying to time the markets.
Sources: Morningstar Direct, Wall Street Journal, Merrill Lynch, JPMorgan