January 2025 Market Review
“The investor’s chief problem, and even his worst enemy, is likely to be himself.”
– Benjamin Graham
January 2025 marked a volatile yet positive start to the year, with markets digesting economic data, Federal Reserve actions, and geopolitical developments. While large-cap stocks rebounded, small and mid-cap equities outperformed, and international markets showed resilience. Investors now face fresh challenges from AI disruptions, tariffs, and shifting Federal Reserve expectations.
Key Takeaways
1. AI Disruptions: DeepSeek’s rise as a major AI competitor is challenging U.S. tech dominance, adding market volatility and potentially new regulations.
2. The Fed is Staying Cautious: The Federal Reserve is keeping rates steady as persistent inflation remains a top concern.
3. Tariff Tensions: Tariffs on international trade may raise costs for companies reliant on overseas supply chains.
Market Performance: A Strong Start
| Index | YTD TR (%) | Jan 2025 Monthly TR |
|---|---|---|
| US Large Cap – S&P 500 | 25.0% | 2.8% |
| US Large Cap – Tech Heavy NASDAQ | 29.6% | 1.6% |
| International Equity – MSACWI ex US | 6.1% | 4.1% |
| US Small/Mid Cap – Russell 2500 | 12.0% | 3.5% |
| Bloomberg Aggregate Intermediate Bond Index | 1.3% | 0.5% |
Source: Bloomberg
Sector Highlights:
- Large Caps (S&P 500): Strong rebound from December, led by rotations into Communication Services, Financials, Healthcare, Materials, and Industrials.
- Technology (NASDAQ): Modest gains despite AI challenges due to increased competition from DeepSeek.
- Small & Mid-Caps (Russell 2500): Outperformance driven by lower valuations, stabilizing interest rate environment, and renewed investor appetite for domestic growth.
- International: Benefited from strong European market gains, investor sector rotation, and resilience amid U.S. tariff tensions.
- Bonds: Yields remain attractive and offer a source of diversification.
AI Disruptions: DeepSeek Shakes Up the Tech Sector
January saw heightened volatility in the Tech Sector as DeepSeek, a rapidly emerging Chinese AI firm, disrupted the competitive landscape. With significant advancements in large language models and generative AI, DeepSeek challenges U.S. tech dominance and raises questions about global AI leadership.
- DeepSeek’s breakthroughs include reinforcement learning techniques, reducing computational demands and lowering AI development costs.
- U.S. AI chipmakers saw price declines as investors speculated that China may seek alternatives to U.S. semiconductors.
- In response, the U.S. Government is considering new AI chip export restrictions, which could limit China’s access to cutting-edge semiconductor technology.
Investor Insights: While DeepSeek’s rise added short-term market volatility, U.S. tech remains dominant, with leading-edge infrastructure, deep research talent, and regulatory advantages. Investors should stay the course and view AI disruptions as a catalyst for long-term innovation.
Federal Reserve: No Rate Cuts in January
The Federal Reserve Open Market Committee (FOMC) held rates steady in January, reinforcing the notion that rates will remain “higher-for-longer.” While inflation has cooled, strong labor markets and resilient consumer spending have led policymakers to push back the timeline for potential rate cuts. Initial expectations of a March rate cut have faded; markets now anticipate the first cut of 2025 to come in Q3 or Q4.
Investor Insights: With rate cuts delayed, income-generating investments like bonds and dividend paying stocks remain attractive for income investors.
Tariffs: President Trump’s Negotiation Tool
The new Administration announced significant tariffs on Canadian, Mexican, and Chinese imports, aimed at addressing unauthorized immigration, drug trafficking, and bolstering U.S. manufacturing.
- Mexico and Canada secured a 30-day delay in exchange for enhanced border security measures.
- An additional 10% tariff on Chinese imports went into effect, prompting China to implement retaliatory tariffs on U.S. goods.
Investor Insights: Tariffs add economic uncertainty and may lead to increased costs for imported goods, higher consumer prices, and inflation. Long-term investors should focus on diversification and view short-term disruptions as part of a broader market cycle.
Final Thoughts: Stay Diversified & Stick to Your Plan
January 2025 showcased market resilience despite economic uncertainties. AI disruptions, trade tensions, and Fed policy created short-term volatility, but strong returns across multiple sectors reinforced the importance of diversification. Investors should remain patient, stay diversified, and avoid emotional decision-making. The best investment strategies focus on long-term fundamentals rather than short-term headlines.
Recommendations
- Stay the Course: Markets fluctuate, but history shows long-term investors benefit from staying invested.
- Balance Growth and Stability: Exposure to multiple sectors, markets, and regions can reduce risk overall.
- Capitalize on Higher Yields: With the Fed keeping rates elevated, consider bonds and dividend-paying stocks.
Conclusion
As we move forward in 2025, staying disciplined, prioritizing quality investments, and maintaining a long-term perspective will be key to navigating market uncertainties and capturing opportunities.
Are you a Trajan client? Contact our Portfolio Management Group at 1 (800) 799-3320 for a personalized portfolio review to ensure your portfolio is well-positioned for the evolving market environment.
If you’re not a client yet, let’s talk!
