As we step into the new year, January has already delivered a whirlwind of activity. From the groundbreaking release of the DeepSeek AI model to unexpectedly strong U.S. job data pushing bond yields to their highest levels since October 2023, and the much-anticipated tariffs confirmed over the weekend, there’s plenty to unpack. Additionally, the Federal Reserve’s decision to maintain the federal funds rate, providing a neutral outlook on future monetary policy, stood out as a non-event. Dive into these developments and more in this month’s update.
Key Highlights: Navigating January of 2025
Economic Overview: January’s economic landscape was marked by inflation concerns, a strong dollar, and new tariffs from the Trump administration, leading to market volatility.
Equities: U.S. equities ended January positively, with the S&P 500 and small caps gaining, despite a tech sell-off triggered by the DeepSeek AI model release.
Fixed Income: The fixed income market experienced significant volatility, with the 10-year Treasury yield peaking at 4.79% before settling lower, influenced by inflation and job market data.
Real Estate: Real estate saw increasing supply and slow demand, with mortgage rates rising slightly and homes taking longer to sell, though underlying home values continued to appreciate.
Economic Overview
Several significant developments shaped the economic landscape in January:
• US Inflation Data: Inflation showed a slight decrease but remained above the Federal Reserve’s target, leading to market uncertainty about potential rate cuts. Initially, the market priced in a higher probability of a second rate increase this year, but these probabilities fell following comments from Jerome Powell as the Fed met expectations and held rates steady for January.
• US Dollar: The US dollar reached a 40-year high (as measured by the Fed’s Broad Real Dollar Index). There is ongoing debate about whether the dollar is overvalued given the strength of the US economy.2
• New Trump Administration: The new administration took office with many comments regarding potential tariffs and other international posturing. Over the weekend, tariffs were announced on Canada, Mexico, and China, leading to a broad equities selloff as we move into February.
• DeepSeek AI Model Release: The release of DeepSeek’s new AI model caused a stir in the market, leading to a significant, although temporary, selloff in tech stocks. On January 27th, the NASDAQ dropped 3.07% and Nvidia fell 16.97%. This event highlighted the market’s reliance on a few dominant technology companies and raised questions about their valuations. The market impact was due to the possibility that DeepSeek’s technology could undercut the dominant players in the tech industry and become an open-source competitor.2
Equities
U.S. equities closed January on a positive note despite mid-month volatility and are entering February with many questions regarding the impact of international policy:
• S&P 500: The index had a solid performance, gaining 2.8%, and small caps also rose, closing the month up 2.58%.1
• Tech Sector: Concerns remain about the market’s reliance on a few dominant tech firms; the DeepSeek AI model release triggered a tech sell-off.
• Market Broadening: Despite the tech sell-off, the market broadened, with consumer staples and other sectors outperforming tech since the election.2
Fixed Income
The fixed income market saw significant shifts and volatility following data releases and Fed decisions:
• 10-Year Treasury Yield: The yield rose to 4.79% in a bond selloff early in the month, the highest since October 2023, but then declined to close the month at around 4.55%.1
• Volatility: Bond yields experienced significant volatility due to shifting inflation concerns, job market strength, and adjustments to expectations regarding future rate cuts by the Federal Reserve.
• International Bonds: In the UK, 30-year gilt yields rose to their highest levels since 1998 before declining, highlighting concerns about the UK’s economic outlook and fiscal situation.2
Real Estate
January’s real estate data indicates a market with increasing supply and slow demand: mortgage rates slightly increased, homes took longer to sell, and although the median price of homes decreased, the price per square foot increased, indicating that underlying home values are still rising.
• Mortgage Rates: Rates increased slightly from 6.85% to 6.95% between the end of December and the end of January.3
• Market Supply and Demand: Homes spent an average of 73 days on the market, the slowest January since 2020, and the total number of homes for sale increased by 17.1% compared with last year. This marks the 14th consecutive month of annual inventory growth. However, while inventory is improving, it is still down 24.8% compared to pre-pandemic levels.3
• Home Prices: The median price of homes for sale decreased by 2.2% compared to last year, to $400,500. However, the median price per square foot increased by 1.2%, indicating that home values are continuing to appreciate despite more smaller homes being listed this year.3
Closing Remarks
January 2025 presented a complex mix of market and economic trends, characterized by both strong rallies and significant declines. The strength of the dollar remains a significant factor, influencing international trade and investment flows. The market’s reliance on a few dominant technology stocks continues to be a double-edged sword, providing both stability and vulnerability. However, there are hopeful signs of gains broadening out to other sectors, which could lead to a more balanced and resilient market.
Investors must remain vigilant to the implications of rising yields, which can affect borrowing costs and corporate profits. Trade policy changes, particularly the newly announced tariffs, add another layer of uncertainty that could impact global supply chains and market sentiment. Additionally, shifting inflation expectations will play a crucial role in shaping monetary policy and market dynamics in the coming months.
As we move forward, staying informed and adaptable will be key. The interplay between these various factors will likely continue to drive market volatility, presenting both challenges and opportunities for investors. By keeping a close eye on economic indicators and policy developments, investors can better navigate the complexities of the current market environment.
Allen, Henry and Jim Reid. “December, Q4 and 2024 Performance Review.” Deutsche Bank Research, January 2, 2025
Morgan Stanley. “Stock Market Review 2024: 5 Questions for 2025.” Morgan Stanley, https://www.morganstanley.com/ideas/stock-market-review-2024-questions-2025. Accessed January 2, 2025.
Multpl. “S&P 500 P/E Ratio by Year.” Multpl, https://www.multpl.com/s-p-500-pe-ratio/table/by-year. Accessed January 2, 2025.
IMPORTANT DISCLOSURE: The information contained in this report is informational and intended solely to provide educational content to our clients and other readers that we find relevant and interesting. Opinions expressed are just that, and are current only as of the data of publication Nothing in this document should be construed as investment advice; we provide advice on an individualized basis only after understanding your circumstances and needs. The information presented in this newsletter is based on reports from Deutsche Bank and Bloomberg’s ‘Markets Daily’ series. Data provided comes from sources we believe are reliable, but accuracy is not guaranteed. Discussion of sectors and the performance of region-specific equities and bonds generally refers to market indices. We use the S&P 500 to represent US large-cap; the Willshire Small Cap to represent US small-cap; the MSCI ACWI ex US to represent international equities; the US 10-year Treasury Yield to represent US Treasuries; the ICE BofA European Government Bond Index to represent European bonds; the ICE BofA US Corporate Index Effective Yield to represent investment-grade bonds; the ICE BofA US High Yield Index Effective Yield to represent high-yield bonds; the FRED 30-Year Fixed Rate Mortgage Average in the United States to represent mortgage rates. Indices are unmanaged, are not subject to investment management fees or transaction costs, and it is not possible to invest in an index. Index performance can provide general information about how a particular region or investment has performed, but does not provide information about the performance of Ceva’s client portfolios. Actual client performance may differ materially from the index performance discussed. Past performance is not a guarantee of future results. Financial planning is a tool that can help clients consider different current and future scenarios and construct portfolios designed to meet specific goals and address specific risks. Financial planning does not guarantee a positive outcome or prevent loss. It’s important to revisit financial plans and the underlying assumptions of those plans regularly, and to make adjustments as needed to respond to changing circumstances.
