Monthly Market and Economic Update - January 2025

Current Market and Economic Conditions

• For January, the S&P 500 Index was up 2.78%, while the Bloomberg Barclays US Aggregate Bond Index was up 0.50% and the Bloomberg Barclays Municipal Bond Index was down 0.13%.¹ 
• The market started the year much like it finished last year with the AI trade still in a leadership position with some cross currents developing as the new administration was sworn in.¹ 
• The Federal Reserve confirmed that they will continue to take a wait and see stance with interest rates both based on the inflation data and the new fiscal policies. 

Bond Market

• At their January meeting, the Federal Reserve Open Market Committee (FOMC) voted to keep the Fed Funds Rate in the 4.25% to 4.50% range. Based on their own projections and the outlook in the Fed Funds Futures Market (CMEgroup.com), the Fed is projected to reduce the rate by a quarter point only one or two more times during 2025. The two Congressional mandates for the Fed are maintaining appropriate economic growth to support a healthy job market and to provide stable prices. The job market remains strong with the Jobs Opening Index (JOLTS) continues to be above historical average and the initial claims for unemployment insurance remaining low on a historical basis. While rate of inflation has fallen from the heights seen in 2022, it is not yet at the level that the Fed would be in favor of lowering rates further. The Fed Funds Rate will remain “higher for longer” unless the rate of inflation eases and/or the job market falters.  
• The bond market had anticipated a pause by the Fed due to higher inflation as reflected in the yield on the 10-year Treasury. The yield rose about a quarter point during the first half of the month but fell back to 4.57% by the end of the month. The new administration policies to strengthen the dollar and raise tariffs have pushed some investors into the risk-off trade and to buy Treasuries. The bond market is also reacting to a job market which seems to be steady and strong without overheating.  
• For bond investors, the steady job market, and the potential for improving inflation may allow bonds to provide positive total return. Also, due to the higher relative bond yields any change in interest rates whether up or down will have less impact to bond values than when the starting yields were much lower a few years ago. 

Stock Market

• The stock market has started the new year generally in an upward direction. While the AI trade still maintains dominance over the market, that dominance may have faded a bit with the introduction of a new low-cost player in market. Earnings growth and profit margins are holding at lofty levels which has helped keep valuations high despite higher interest rates. However, based on those lofty valuations for growth stocks and the uncertainty around fiscal policy changes, investors have broadened their view on other sectors of the stock market looking for bargains. The biggest bargains can actually be found in international stocks where valuations have been beaten down to historically low levels relative to US stocks. It is the uncertainty surrounding the international economies that has pushed the prices of these stocks down. But this has also made them bargains when compared to their US counterparts. This may be the year when diversification has a positive impact for investors.  
• The one thing that investors don’t care for is uncertainty, especially when stocks are trading at lofty levels. Historically, regardless of the political party in power, the market has been volatile and lackluster in returns during the first year and a half of a new administration as the market digests the new fiscal policies. The market is anticipating the new administration will be pro-business focused on deregulation, tax cuts, steady energy prices and interest rates. Once the market senses that these new policies are front and center, the momentum will likely turn up again. 
• The US economy has found sure footing and grown at a steady pace over the past few quarters. Both markets and the Federal Reserve are in a wait and see pattern looking at steady job growth and improvement in the rate of inflation along with the potential impact of fiscal policy changes as the new administration sets course. In the event of a near term valuation correction, investors should continue to focus on the longer-term path of the stock market and the economy and take advantage of short-term volatility by rebalancing to their appropriate risk profile. 

Portfolio Management

• The allocation for each investor should be diversified between growth and safety based on their own tolerance for risk in the short run and their desire for growth in their investments in the long run. Determining the appropriate asset allocation and risk-reward trade-off is the most important decision for investors.  Once determined, staying invested during periods of uncertainty and rebalancing back to the selected risk profile can help investors achieve their long-term goals.      

Please reach out to your Advisor if you have any questions.