February 5, 2025

U.S.  stocks ground higher in January despite a volatile bond market early in the month and the emergence of China’s DeepSeek chatbot near the end of January. The broad market, as measured by the S&P 500 Index, gained 2.8%. Communications services (+9.1%) was the best performing sector, while technology (-2.9%) was the worst.  There was no pronounced January effect to boost small-cap stocks, however there was a better bid for mid-caps.  Within the large-cap space, secular growth outperformed cyclical growth as the DeepSeek chatbot took a bite of the mega-cap tech stocks (namely NVIDIA).  In fact, technology was the only large-cap sector to register a decline in January.

Macroeconomic readings have tilted more positive lately with strength in small business sentiment, retail sales, housing starts and industrial production. On the negative side the services sector suffered a setback in January primarily due to cold weather. The labor market remains healthy for now, although job growth may suffer a temporary hit from LA fires, while any impact from immigration crackdown/deportations could loom in the future. The CP¹I was better than feared with the headline number still moving higher, but core CPI showed some early signs of easing; unfortunately, wholesale inflation continues to heat up.  The January FOMC meeting produced the rate cut pause that had been well-signalled.  A less friendly Fed, uncertainty on timing and scope of Trump policies, the DeepSeek phenomenon, and the prospect of contentious fiscal budget battles ahead have removed some of the froth from investor sentiment.  However, share prices are far from bargain levels and any move back towards 5% in the 10-year US Treasury yield (recent cooling notwithstanding) could be problematic for the stock market.

¹The Consumer Price Index (CPI) is an economic indicator that measures inflation in the United States.