Economic Vibrancy
More Januarys than not seem to experience positive market returns. A few economic theories attempt to explain why this market anomaly could exist. One theory is some investors sell securities in December for tax purposes and turn into net buyers in January. Well, this January followed historical examples as global markets broadly earned investors returns in January, setting 2025 off with positive momentum.
Asset classes such as equities, bonds, and commodities survived an intense and complicated month for investors. First, there was the presidential inauguration, in which power transitioned smoothly to the new administration. President Trump’s tariff agenda could cause some alarm from a purely financial perspective. However, market prices have barely flinched and remained firm as new information around tariffs updates frequently. This market resiliency among investors could indicate that tariff news, their costs and benefits, and the expected durations of the tariffs are already reflected in global market prices. In other words, tariffs present no reason to sell investments now because markets previously accounted for those factors and likelihoods through discounted cash flow analyses many months ago. Still, investors should have some tolerance for future market adjustments as the likelihood of tariffs becomes a reality.
The December Consumer Price Index (CPI) reported inflation finished in line with expectations. Yet, there are concerns that inflation may be stickier later due to tariffs. Yes, headline inflation rose month over month in December, but that was due to volatile price inputs like food and energy. More importantly, the core inflation rate, which excludes food and energy, decelerated and was in line with expectations in December, illustrating the positive economic change that has occurred since interest rates increased due to monetary policies. Furthermore, the steady inflation report increases confidence among bond investors since above-average inflation appears less threatening now compared to two years ago.
January also offered investors their first monetary policy decision in 2025. As expected, the Federal Reserve left interest rates alone. However, investors did notice a hawkish signal based on what was omitted from the Fed’s prepared remarks. To be hawkish means to expect higher interest rates for more extended periods. The Fed removed commentary regarding the progress inflation has made as of late. As a result, investors viewed the omission as a possible indicator that some market inflation risks may still exist. Regardless, investors saw through the Fed’s interest rate decision, leaving global market valuations relatively unchanged.
One event in January might have caught investors by surprise. A Chinese company released open-source code for its Deepseek AI model to exemplify its technological prowess. American companies, such as Open AI, Google, and Meta, instantaneously felt the threat of its advanced features and low-cost tech. The Deepseek model showed investors that high-quality AI is possible with fewer hardware demands and monetary costs. Immediately, investors sold NVIDIA’s stock after they learned that maybe fewer hardware sales would be needed as AI technologies advance. The NVIDIA reaction is interesting because it’s a modern example of what can happen to a stock when investor expectations quickly change.
US gross domestic product (GDP) did well in the fourth quarter of last year. Although US expenditures grew slightly less than in the third quarter, its fourth-quarter growth indicates that the economy is currently healthy and stable. Investors can enjoy this moment since the economy’s growth means incomes have risen, debts remain serviceable, and the economy is productive, which may be beneficial for the investment landscape.
Investor expectations for a positive January were met this year. One favorite investor trope is that where January goes, so goes the market. The positivity is welcomed, but the road to ending 2025 is long, and investors should expect to see quite a few economic developments along the way that will surely continue to influence the financial markets.
