The month of January witnessed the averages finish positively to begin the year. The Russell 2000 (the small-cap index) turned in a stellar month. The index is essentially playing catch-up to the other averages. The NASDAQ eked out a gain, but investment dollars were moving and hunting away from The Magnificent Seven and Technology. Energy, Materials and the conservative Consumer Staples sectors won the investment money flow. Industrials gets an honorable mention. Financials, Technology and Healthcare brought up the rear.
Fast forward into February and the relative calm to start the year dissipated. Volatility has elevated. Stock prices of The Magnificent Seven have been damaged post earnings releases. Fears over excessive capital spending and an overcrowded AI trade have contributed. It is remarkable that the DOW reached 50,000 with this backdrop. Small-caps have remained resilient, and only the NASDAQ is negative for the year through February 10th.
S&P 500: Jan +1.37%
DOW: Jan +1.73%
NASDAQ: Jan +0.95%
Russell 2000: Jan +5.28%
Sector Performance thru January:
Communication Services +5.70%
Consumer Discretionary +1.70%
Consumer Staples +7.52%
Energy +14.37%
Financials -2.61%
Healthcare -0.18%
Industrials +6.62%
Technology -1.69%
Materials +8.65%
Reals Estate +2.74%
Utilities +1.32%
Current U.S. Treasury Yields:
6 Month Bill 3.59%
2 Year Note 3.45%
5 Year Note 3.69%
10 Year Note 4.14%
30 Year Note 4.78%
The Economy and the Fed:
Chair Powell and the FOMC left rates (3.5%–3.75%) unchanged at the January meeting. Powell cited that “inflation remains somewhat elevated,” “economic activity at a solid pace,” and the “unemployment rate shows signs of stabilizing.” Powell mentioned that the Fed didn’t see any increased risks from a weakening labor market or inflation rising.
Recent data indicated initial jobless claims were up, but only slightly. JOLTS data came in weaker than anticipated. Retail sales were flat in December. CPI for December increased 2.7%, while sales rose 2.4%. Reasons given by the Commerce Department were weather, tariffs and persistently higher inflation. None of these items point to larger systemic problems brewing. The economy is in a good place.
Looking Ahead:
Almost three quarters of the S&P 500 have reported corporate earnings. This quarter is printing below the numbers posted in Q3 but solid, nonetheless. Almost 70% beat estimates and the aggregate earnings beat is roughly 9%. The weakness in the U.S. dollar has enhanced revenue with international exposure. Valuations for equities are supported and not stretched.
The market has truly broadened out. It is no longer being braced by a handful of Technology names. Despite this, the market was clearly taken aback by the corporate earnings conference calls regarding cap-ex spending. Analysts appeared blindsided. The market reaction overshot to the downside, then reflected, and repriced and steadied. The demand for chips, energy and the AI build out is massive.
We believe that volatility is here to stay. Risk appetite remains healthy, and the market will continue to broaden out. Investing outside the U.S. internationally is gaining momentum, even after turning in a decent 2025. Japan is also grabbing investment attention. Emerging markets remain further down the quality scale.
We expect the markets to remain on a positive trend. Stock selection is paramount and instrumental in achieving sector diversification. For portfolios in need of fixed income, staying short in maturities is our course of action. We continue to have cash on hand. Both cash and fixed income act as volatility buffers. We are encouraged with the economic and earnings backdrop and remain constructive on the markets.