February 5th, 2025
Welcome to 2026… I mean, February.
Since the beginning of the year when I wrote our last update, we’ve seen a bewildering number of Executive Orders, an artificial intelligence (AI) model out of China (DeepSeek) which spooked the market, various territory acquisition threats by the POTUS, and the beginning of a trade war with our North American allies as well as China. Surely, by the time you read this there will be some additional shocking news. And still, the market remains near all-time-highs.
Many of you who subscribe to this email are our clients. And I have spoken with many of you in recent days who are deeply concerned about the severity of the market’s reaction to these things and the very real effects they may have.
Much of the diversification structures we use today depend on principles defined by Modern Portfolio Theory (MPT) and the Efficient Markets Hypothesis (EMH) – which are based on the following premises: markets are efficient, investors are rational, diversification reduces risk therefore portfolio design is paramount, and all assets being traded are correct and reflect all available information.
There’s that word you hear so much about in the investment world, ‘diversification’. It seems like a cliché, but it’s truly a necessity for riding volatile times like these. And so, we diversify. Because markets are efficient, and we are rational.
Trump is inflationary, disruptive, and, to some degree, unpredictable. I also believe that Trump will most certainly use one thing as his barometer for success throughout his second term as president: the market.
Trump refers to his mandate often. Whether one agrees that he has one or not is irrelevant. The fact is, he believes he has one. That mandate includes tax cats, reshoring manufacturing, deregulation of several industries, mass increase to energy production, and austerity. These things can have a positive effect on the market – and we should align our investments appropriately.
We must trust in our strategies while being mindful that the abrupt changes being made to our foundation can have massive consequences to society, and our economic landscape. That means we need to be able to change our mind – which is why we have had the long-standing policy of everything we buy today, can be sold tomorrow. None of our investments have a lock-up/holding period. Liquidity is king, not cash.
Fundamentally, the economy is thriving. Unemployment is low, inflation is within ‘normal’ range, corporate profits are robust, GDP in 2024 was excellent, and – despite the chaos – there’s a lot of economic potential in 2025. So we will invest, diversify, trust our strategies, and make changes if and when we need to.
And now, your Monthly Market & Economic Update by the numbers.
Warmly,
Mark S Sauer
Market Update
Global Equities: Despite the volatile month, January was a net positive for the US equity markets. The S&P 500 gained 1.82% on the month. The Nasdaq Composite grew 1.71%, while the Dow Jones Industrial Average was our big winner growing 4.7%.
Economic Update
No Surprises from Fed: The Federal Open Market Committee (FOMC) left rates unchanged and provided little insight into its path moving forward. The FOMC removed a sentence from its commentary regarding inflation making progress towards the Committee’s 2% target, which markets took as a hawkish change. Chairman Powell dismissed this notion, however, and focused on the strength of the US economy in his press conference with reporters. That economic strength, Powell stated, affords the Fed flexibility to be patient with rate cuts and evaluate the impact of the Trump administration’s economic policy initiatives.
Core PCE: The Fed’s favored inflation metric, the Core Personal Consumption Expenditure (Core PCE) index, was in line with estimates in December. Core PCE, which excludes food and energy, increased 0.2% during the month and rose 2.8% for the year. The broader headline PCE number rose 0.3% for the month and 2.6% annually. Energy prices were up 2.7% during the month while food rose just 0.2%. The good news is that the annual rate could decline significantly if there is no early 2025 surge as there was in 2024. The abnormally hot inflation from January-March 2024 will gradually fall off the data set for the annual calculation, so inflation could be much closer to the 2% target barring any unforeseen uptick in the coming months.
Big Tech Earnings: The final week of January was arguably the most important week of earnings season, with Tesla (TSLA), Microsoft (MSFT), Meta (META), and Apple (AAPL) all reporting. Tesla missed estimates on an 8% revenue decline and another quarter of falling sales. Shares rose, however, on promises that the long-delayed autonomous vehicle rollout would occur in the first half of 2025. Microsoft earnings were the opposite, with the software giant eclipsing analysts’ estimates only to be rewarded with a -6% pullback in shares due to disappointing Azure cloud business growth. Meta beat estimates and continued to spend aggressively on artificial intelligence. Apple also beat estimates to post its all-time best quarterly results, although Chinese iPhone sales were disappointing, and shares ended the post-earnings session lower.
Producer Prices Decline: Input prices also showed signs of softening inflation in December, a welcome sign after the prior month’s report came in hot due to some one-off price surges. The Producer Price Index (PPI) was up 0.2% monthly for an unchanged 3.3% annual reading; however, the core (ex-food and energy) measure came in flat for the month. PPI is considered a leading indicator of consumer inflation, since input prices are passed along to consumers.
Chinese Bond Catastrophe: The Chinese central bank announced it would stop buying government bonds this week to halt the staggering plunge in yields that has taken the 10-year bond yield to a record low of 1.6%. Concern is growing that China is falling into a deflationary spiral that could usher in a prolonged economic downturn, similar to Japan’s “lost decades”.
Charts of the Month
Financials
Our first chart shows the SPDR Financial Select Sector ETF (XLK) over the past six months. Note the gap up in price that occurred in early November as markets celebrated the Trump victory as a favorable outcome for big banks. The celebration was short-lived, however, as hot inflation caused investors to dial back hopes for big corporate tax breaks, and the gap was filled on the downside price movement. Financials got two sources of good news this week, however, as cooler inflation and stellar corporate earnings combined to push XLF back above its 50-day moving average (blue line). XLF now has momentum to retest the prior high, although there remains much uncertainty over how Trump will deliver corporate tax cuts amidst calls for fiscal restraint in DC.
Source: AllOneWealth via TradingView
10-Year Treasury Yield
Our next chart shows the 10-Year Treasury Yield, over the last twenty-five years. While the Fed’s rate cuts were supposed to bring rates down across the board, the opposite has happened. While sticky inflation is partially to blame, the bigger growing concern is the ever-growing Federal deficit. Despite strong US GDP growth, lawmakers continue to spend more than they bring in, and the bond market is sending a clear message that the bill for all that spending is coming due. Yields have reached a new post-Global Financial Crisis high, and it appears the runway to 5% and beyond is in sight.
Source: TradingEconomics.com
Tariffs
Our final chart shows the categories of goods most likely to be impacted by the tariffs on Mexico, China, and Canada – this is if the 30-day period (on Canada and Mexico) lapses and Trump’s original tariffs are implemented. Canada and Mexico will be subject to 25% tariffs, with a 10% exemption for Canadian oil. Chinese goods will face a 10% tariff. The intent of the tariffs is two-fold; to punish Mexico and China for the influx of immigrants and Chinese-made fentanyl coming across the border, and to encourage manufacturers to re-shore production to the US. The latter goal may be difficult to achieve through punitive tariffs, since manufacturers would have to pay US workers much higher wages and incur capital costs to establish domestic production facilities. Economic studies on Trump’s 2018 tariffs widely agreed that the result was US job losses and higher prices, as the costs of tariffs are borne by the importer and ultimately passed on to consumers. Yet, with the US operating from a position of economic strength, it could be that President Trump is merely attempting to flex his muscle with a “shock and awe” foray to what will eventually become a negotiation as we’ve already seen to be the case with Canada and Mexico.
Source: US Census Bureau
