The market had a strong start to the year notwithstanding some sharp declines throughout the month which then ended on a down note.
For January, the S&P500 gained 2.7%, the DJIA rallied 4.7% and the NASDAQ advanced 1.7%. Mid-caps and small caps advanced 3.8% and 2.8% respectively, while the S&P 500 equal weight (RSP) gained more than three percent. The rest of the developed world (CWI) rallied around 3.5%.

Value outperformed growth, and international outperformed the U.S. Bonds increased fractionally. Healthcare (6.8%) and Financials (6.5%) were the strongest sectors, while technology (-.7%) and consumer staples (.5%) were the weakest.
TWG Model portfolios advanced between 1.8% to 2.3% before fees.

WHAT MOVED MARKETS
December inflation data was mixed. Purchasing managers’ index, the inflation factor at the wholesale level which leads to inflation at the consumer level, came in softer than expected. CPI came in mixed with headline coming in hotter than expected, but core (excluding volatile food and energy) came in lower than expected. One notable change in the inflation components was the shelter index price increasing 4.6% year over year, the lowest level since January 2022. Shelter has been one of the stickier parts of the inflation story over the past years, so a decline is encouraging. Treasury yields dipped and stocks ripped on the reports.

December job data showed signs of stability, which will likely shift the Fed’s focus back to the inflation side of their dual mandate.
The last week of the month was extremely volatile, starting with the Chinese AI company DeepSeek stating they were able to successfully create a Large Language Model (LLM) with fewer chips at a substantially lower cost to build. Anything in the AI space declined sharply, and the QQQ declined almost 3% on the day. The QQQ and S&P 500 almost fully recovered by the end of the week.

The Fed also kept rates steady, as expected, during their January 19th policy meeting. Tariff talk coming out of Washington DC is certainly moving the market much more than the Fed this month. There are a lot of considerations for the market to digest which seem to change daily.

Earnings have been quite strong to kick off the season, and many of the Magnificent 7 constituents reported in the final week of the month. Meta and Tesla rallied post earnings, but Apple and Microsoft slumped over concerns about declining phone sales in China and a slower pace of MSFT’s cloud growth.

Finally, GDP for Q4 came in at 2.3%, below the 2.6% expected, and much lower than the Q3 print of 3.1%. Growth, while slightly moderating, is still positive and supports the strong economic narrative.

PORTFOLIO ADJUSTMENTS
As the portfolio transitioned into January, we effected reductions of QQQ holdings, alongside an increase in the S&P 500 index fund (SPLG). These adjustments reflect a strategic pivot in response to the evolving market conditions and aim to reduce risk from market volatility due to macroeconomic factors.

The addition of the Invesco pure growth fund (RPG) indicates a significant focus on growth-oriented investments that emphasize stocks with strong earnings growth potential, both enhancing and diversifying the growth prospects of the portfolio.
RPG is a much different growth fund than QQQ. While the top ten holdings of QQQ are very similar to the top 10 holdings of the S&P500, the weighting in those top 10 companies is much higher in QQQ. RPG, however, is allocated more evenly to the 60+ stocks within the fund. Cruise lines Norwegian, Carnival and Royal Caribbean are top holdings, and have rallied between 11-20% for the month. Delta and United Air are also in the top ten, as the leisure trade continues to break out. RPG enables us to access companies that are growing faster than the broad market beyond mega cap tech, which appears to be taking a breather.

LOOKING AHEAD
As surmised in our December note, the market showed exuberance as the new administration took control but also exhibited increased volatility due to uncertainty in how the new administration policies would evolve.
Throw in the fact that the Deep Seek news puts into question the benefit of the large spending budget from the mega cap tech companies, and ongoing talk of broad tariffs, the market is faced with heightened uncertainty. Uncertainty is not something that spurs confidence, and the market is reacting as one would expect – lots of ups and downs.

However, we take comfort in the fact that, on a fundamental level, the economy is operating on a solid foundation. With positive GDP, low unemployment, growing corporate earnings, and inflation that continues to wane, we are confident that the stock market can continue its ascent.

We anticipate ongoing volatility in the months ahead as policy takes shape and the world responds to adjustments at the government level. Many policies can be described as pro-growth (less regulations, potentially lower taxes), but will not come without risk.

We will continue to objectively navigate the market as these stories and themes unfold, monitoring their impact on various areas of the economy. We are confident in the tools we have to manage risk in a seemingly riskier environment, and do not see the conditions that would imply a recession, or a significant economic slowdown is on the near horizon.

We hope you enjoy the longer days in the month ahead. Please contact our office if you have any questions or concerns.