Market Commentary - January 2025

Monthly Update

January ended and February started with a lot of drama related to the tariff threats President Trump threw at Canada, Mexico and China. These are our three largest trading partners in terms of total trade (both imports and exports). As seen with Trump’s first administration and the tariffs placed on a variety of our trading partners, we knew we were going to see more with Trump 2.0 as he told us. As of this writing, in return for a stronger response by Canada and Mexico to its borders in both stopping the transportation of fentanyl and migrants, the 25% tariff threat was pulled back with Canada and Mexico. Trump’s threat worked in hopefully stemming the flow of both and getting more participation from each country in helping to do so, even though more of the issue is with Mexico. The 10% across the board tariff on China, which resulted in some retaliation back against the US still seems open to negotiation.

I’d argue that the tariff strategy is falling into three buckets to keep in mind. One, what we’ve seen in early February where they are used as a cudgel in order to achieve a non-economic end, as stated above on fentanyl and migrants. Secondly, to use tariffs to protect some domestic industries, like steel and aluminum that we saw in 2018, and also encourage manufacturers to bring production back to the US. Thirdly, the administration will likely use tariffs to raise money as part of the Trump income tax extension deal needed this year. As part of the reconciliation budget process in getting a tax bill passed, there needs to be spending and tax offsets. We hope there is more of a lean towards spending cuts.

As for US Main Street businesses that are caught up in the middle of all of this, I have to believe many are on edge, visibility is limited and we’ll see what that means for hiring and capital investments. Businesses can adapt to whatever comes their way so with the tariffs, the quicker we know about its details and the expected retaliation the better able they will manage through them.

After a solid stock market performance in 2024, mostly driven by the biggest tech stocks we all know about, January started off in a positive way and broadly too. The S&P 500 was higher by 2.7%, the NASDAQ rallied by 1.6% and the small cap Russell 2000 index was up by 2.6%[1]. Interestingly, there were some overseas markets that did even better than these US indices. The STOXX Europe 600 index bounced by 6.3% while most Asian markets were flattish[2].

On the rates side, the most noteworthy aspect of market behavior in 2024 was while central banks were cutting short term interest rates, longer term interest rates went higher. To quantify, while the Fed has cut the fed funds rate by 100 basis points since its September meeting (January 2025 they held steady as expected), the 10-year yield has risen by about 100 basis points. The yield curve via this move finally dis-inverted with the 10 year yield now back above the 2 year yield[3]. Treasury yields in January were little changed from December.

A key impact of the prospect of tariffs has been the ferocious rally in the US dollar against a variety of currencies both in the developed world and versus emerging market countries. On the one hand, it reduces inflationary pressures on things we import but on the other hand it could hurt US exporters that translate foreign denominated sales back to US dollars. The latter is something the new administration might want to influence by rooting for a weaker dollar. Something we’ll be watching and also for its impact on foreign stock and bond markets.

As I write this letter, we are smack in the middle of earnings season. On my last look from FactSet, with about 1/3 of companies in the S&P having reported, 77% of companies reporting have exceeded expectations which is about in line with the long-term beat trend[4]. Revenue growth is up about 5% while earnings per share is higher by about 13% according to them[5]. Of the eleven sectors of the S&P 500, seven are seeing higher y/o/y earnings growth and led by Information Technology, Consumer Discretionary, Financials, Communication Services and Utilities. The key take on 2024 earnings growth was that it was almost entirely driven by the top seven market cap stocks, otherwise known as the big cap tech stocks. Earnings for the remaining 493 were barely positive. This year we are expecting more broadening out with quicker growth coming from those 493 and a slowdown in growth from the top 7. We need this strong pace of earnings because the multiple on the S&P 500 remains very high at 22 times estimated 2025 estimates[6]. It’s rarified air and not too far from where it stood in March 2000.

With respect to the US economy, headline GDP growth is still running at about 2.5% but the complexion remains mixed[7]. That said, the new administration has brought a lot of optimism to the business community, especially small and medium sized businesses that are looking for relief on the regulatory side. This has been seen in the big rise in the National Association of Independent Business’s Small Business Optimism Index over the past two months. We expect to see this too with only the extent of the deregulation being the question. As stated earlier, tariffs are a focus too for many companies and something we’re all watching to see for its impact.

I mentioned earlier the outperformance of European stocks so far this year and I believe part of it is due to the realization that many government officials, pushed by business and even the Trump win, are beginning to understand that their sclerotic growth condition must change. And they themselves are in a position to change it. Highlighting the growing urgency in Europe was an editorial written by ECB president Christine Lagarde and European Commission president Ursula von der Leyen both penned an opinion piece in the Financial Times in early February titled “Europe has got the message on change…We can no longer squander our strengths with self-imposed handicaps. There is too much at stake.” They propose three cures, “First, we need to make the EU an easier place for innovative companies to grow…Second, we need to make Europe a better place to invest. Two out of three EU companies say that regulation is a key obstacle to investment, while just 14% of them are using AI…Third, we need to make doing business in Europe cheaper, especially in terms of energy costs.” Let’s all hope because the global economy can use a faster pace of business activity in Europe.

Conclusion

The only certainty in life is that it’s uncertain and never boring and now is no different. We are also cognizant of the historical playbook that when everyone thinks one thing will happen, many times the opposite takes place. This contrarian bent hopefully allows us to consider all different possibilities on how the year will play out with the economy and markets.

Much of the equity rally in 2024 was P/E multiple expansion and thus it’s very important that expected earnings growth comes through as well as seeing a lid put on this persistent rise in longer term interest rates. On the fixed income side, we still prefer shorter duration bonds to limit the interest rate risk and luckily, we are getting paid to do so with interest rates most likely staying higher for longer we believe.

Whatever comes our way though, whatever Trump 2.0 brings us, it remains vital that investors have adequate short-term liquidity over the next 2-3 years. Knowing that period is covered can help separate the balance of one’s portfolio from the ups and downs of the market. Time horizon is always crucial and is always the best friend of any investor. We are not just in the asset management business but also in the risk management business and always believe that by watching our back and focusing on the risks, the upside should take care of itself.

Disclaimer

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. The market and economic data is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. The information in this report has been prepared from data believed to be reliable, but no representation is being made as to its accuracy and completeness.

Any company names noted herein are for educational purposes only and not an indication of trading intent or a solicitation of their products or services.

The Standard & Poor’s 500 Index is a capitalization weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.

The NASDAQ Composite Index measures all NASDAQ domestic and non-U.S. based common stocks listed on The NASDAQ Stock Market. The market value, the last sale price multiplied by total shares outstanding, is calculated throughout the trading day, and is related to the total value of the Index.

The Russell 2000 Index is an unmanaged index generally representative of the 2,000 smallest companies in the Russell 3000 index, which represents approximately 10% of the total market capitalization of the Russell 3000 Index.

The Stoxx Europe 600 index also called the STOXX 600 is an indicator of the performance of the European stock market. It measures the performance of large mid and small-cap companies across 17 countries in Europe. The number of constituents is fixed at 600.

The Hang Seng Index is a freefloat-adjusted market-capitalization-weighted stock-market index in Hong Kong. It is used to record and monitor daily changes of the largest companies of the Hong Kong stock market and is the main indicator of the overall market performance in Hong Kong. These 82 constituent companies represent about 58% of the capitalization of the Hong Kong Stock Exchange.

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The Russell 2000 Index is an unmanaged index generally representative of the 2,000 smallest companies in the Russell 3000 index, which represents approximately 10% of the total market capitalization of the Russell 3000 Index.

The Standard & Poor’s 500 Index is a capitalization weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.

The NASDAQ Composite Index measures all NASDAQ domestic and non-U.S. based common stocks listed on The NASDAQ Stock Market. The market value, the last sale price multiplied by total shares outstanding, is calculated throughout the trading day, and is related to the total value of the Index.

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[1] Bloomberg

[2] Bloomberg

[3] Bloomberg

[4] FactSet

[5] FactSet

[6] Bloomberg

[7] Bloomberg