After a flat November and December, the S&P 500 gained 1.45% for January, bringing the 3- month advance up to 1.76%. Mid and small caps rallied 4% and 5.6% respectively, while the Dow gained 1.7%. The NASDAQ 100 (QQQ) gained 1.2%, while the S&P 500 equal weight (RSP) advanced 3.4%. The developed world index-US (CWI) and emerging markets (EEM) rallied 6.6% and 7.2%, respectively, suggesting money was flowing more heavily into foreign stocks. U.S. value gained 2.5%, while bonds gained .25%

For January, value outperformed growth, small companies outperformed large companies, and international outperformed U.S. stocks.

On a sector basis, energy, materials and consumer staples performed the best (14%, 8% and 7%) while financials, information technology and healthcare were the worst performing sectors (-2.4%, -1.6%, -02%)

TWG growth, moderate and conservative portfolios gained 4%, 3.7% and 2.8%, almost doubling their respective benchmarks of 2.2%, 1.8% and 1.5%, as well as outpacing the S&P 500 on an absolute and risk adjusted basis by a wide margin.

The outperformance was widely due to exposure to Semi’s (SMH – up 11%), emerging markets (EEM), Europe (IEV) and value funds.

WHAT MOVED THE MARKETS

Markets were primarily driven by a broadening of market leadership beyond mega cap technology, a shift in Federal Reserve policy expectations, and extreme volatility in commodities.

On January 28th the Fed held interest rates steady, halting a series of cuts from late 2025.  Sentiment was also impacted by Trump’s nomination of Kevin Warsh as the new Fed chair, sparking a dollar rally and a selloff in gold.

Throughout the month, investors rotated away from technology towards cyclical and value-oriented sectors. Small caps outperformed large caps for 14 consecutive days.

Gold and silver experienced a blow off top before a historic one-day sell-off on the final day of the month. Silver plunged 30% and gold declined 10%, which adversely affected other areas of the market, such as semi-conductors and technology.

Markets also reacted to U.S. military action in Venezuela, tensions with Iran, and policy uncertainty regarding potential tariffs on European allies and discussions surrounding Greenland.

The U.S. economy showed resilience with a 4.4% annualized 3Q2025 GDP growth.  However, the labor market signaled fragility, with December adding only 50,000 jobs and unemployment rate at 4.4%. Annual inflation (CPI) moderated to 2.7%, while the U.S. dollar fell to a four-year low mid-month.

Given all these market moving events, we are encouraged that the stock market was able to close the month near all-time highs.

PORTFOLIO ADJUSTMENTS

To start the year, portfolios had a diversified mix across growth-oriented and income generating ETF’s. Key holdings included significant weights in QQQ and SMH, both with elevated beta and upside/downside capture ratios above one, signaling a tilt toward aggressive growth exposure. A value lay in via SPYV, FTCS and GCOW crafted a foundation that combined growth potential with defensive buffers, setting the stage for resilient performance through varied market cycles.

By the second quarter of the month, exposure to QQQ and SMH was trimmed. New positions were introduced such as MOAT and increased weights in value-focused ETF’s like IWN (small value) and emerging markets (EEM). The allocation to international equities in Europe (IEV) rose notably, boosting geographic diversification. These tactical adjustments lowered the overall beta and moderated volatility while capturing potential style rotation from growth-heavy to value/international assets. This proactive risk management and diversification enhancement aimed to improve portfolio stability and broaden alpha sources.

The third quarter of the month was punctuated by further reducing the weight of QQQ, offset by a meaningful increase in SMH. International and emerging markets allocations moderately increased, and the introduction of EFG (international growth) broadened style diversification. These changes increased the portfolios exposure to semis and technology through SMH, which carries higher upside/downside capture ratios while strengthening fixed income exposure via CWB (convertibles). The approach balanced growth segments with increased income allocation to enhance risk-adjusted performance and mitigate drawdowns.

BY the end of January, the portfolios held steady with minor shifts: SMH remained elevated, while QQQ declined further, reflecting continued caution on broad NASDAQ exposure. Allocations to S&P 500 increased, reinforcing core large-cap exposure for stability. IWD (value) was introduced to augment small/mid-cap value allocations with moderate beta and lower capture ratios, complementing existing positions. A slight rise in value (RPV) also highlights emphasis on value styles with risk control. Overall, we incrementally diversified the risk profile while increasing allocations to more stable large-cap and value segments. This approach enhanced portfolio robustness and aimed for steady growth and lowered downside sensitivity.

LOOKING AHEAD

We are anticipating volatility to increase during the first half of the year given the political, geographical, monetary and fiscal landscape. Ever changing trade deals, a new Federal Reserve Chair, softening employment data, and the mid-term elections – to name a few – create uncertainty that will challenge the direction of the markets. We take solace as we move through Q4 earnings season that many corporations’ fundamentals are on solid footing, which should provide a reasonable floor to any market declines. Valuations in mega cap tech remain elevated, and as more companies borrow money to fund their growth, instead of funding growth through free cash flow, we should expect shareholders to be a little nervous.

This is where a good amount of volatility stems from.

Our objective process of allocating your capital to productive areas of the market assists us in managing risk. We ended the month with a much higher level of diversification than in prior months, which has helped us manage volatility. It appears that the rotation has staying power, evidenced by prior unloved sectors showing strength over a period longer than a few days. As our positions in Semi’s, emerging markets and Europe helped us outperform in January, our reduced exposure to large cap technology and increased exposure to large cap value and high free cash flow companies have assisted in managing brief pockets of market declined.

We will remain vigilant in the months ahead and are well positioned to adjust with an ever-changing market.

Stay warm!