Volatility Welcomes 2025
And, just like that, the first month of the first quarter of the last year of the first quarter of the twenty-first century has already come and gone. And it was far from polished where markets were concerned. On more than one occasion January brought single day drawdowns greater than 2% for the S&P 500 Index. Despite this erraticism, most major indexes exited the month with positive returns. Equities returned +3.00% and +1.82% as tracked by the S&P 500 Index and Nasdaq Composite Index respectively. International equities also did well, with developed markets tracked by MSCI EAFE Index returning +5.36% to handily outperform emerging markets that returned +2.15% for the month tracked by the MSCI Emerging Markets Index. Debt returns remained far less volatile than equities and returned +.50% as tracked by Bloomberg's Aggregate Unhedged Total Return index. The Federal Reserve held rates this month and monetary policy continues to be data driven.
While the month ended positively, its duration was not tranquil. Equities ripped at the start of the month as positive fourth quarter earnings came out, but quickly dropped as government restrictions on Artificial Intelligence chip exports were released mid-month.1 This new tightening was immediately felt in the tech-heavy Nasdaq Composite index. The top three names in the index by allocation make up more than 24% and all three are heavily involved in the development of Artificial Intelligence models. Despite these restrictions, markets hastily recovered to rally all the way through the Presidential inauguration. Following the inauguration, equities took another nosedive related to the release of DeepSeek, a Chinese-developed Artificial Intelligence model. Even so, they recovered nimbly and closed the month in the black. The US is engaged in a global technology race, and looking at the previous month’s returns it appears markets, particularly equity markets, will be highly influenced by this contest.
The Federal Reserve cut rates in December, but it should have come as no surprise when they decided in January to hold rates steady. Following the November meeting, Fed Chair Jerome Powell made it clear that the Fed would be making strictly data driven decisions.2 The data produced in the Consumer Price Index (CPI) published mid-month was in line with expectations but did not provide enough easement to warrant another cut. The next CPI will be released mid-February but, investors aren’t yet pricing in another rate cut. Bloomberg's World Interest Rate Probability Function predicts the next wave of this type of pricing-in shouldn’t happen until at least July. All said, markets advertised significant volatility throughout January. While markets have led into February with the same behavior, only time will tell if this trend persists as this quarter century continues its final trek.
Hazel Allen
Portfolio Management Analyst
1https://www.reuters.com/technology/artificial-intelligence/us-tightens-its-grip-ai-chip-flows-across-globe-2025-01-13/
Published January 13, 2025; Accessed January 31, 2025
2https://www.federalreserve.gov/newsevents/speech/powell20241114a.htm
Published November 14, 2024; Accessed January 31, 2025
The S&P 500 Index is the Standard & Poor’s Composite Index of 500 stocks and is a widely recognized, unmanaged index of common stock prices.
The MSCI EAFE Index (Europe, Australasia, Far East) is an unmanaged free float-adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the US & Canada.
The MSCI Emerging Markets Index consists of 23 economies including Brazil, Chile, China, Colombia, Czech Republic, Egypt, Greece, Hungary, India, Indonesia, Korea, Malaysia, Mexico, Peru, Philippines, Poland, Qatar, Russia, South Africa, Taiwan, Thailand, Turkey and the United Arab Emirates. The MSCI is a float-adjusted market capitalization index.
The Bloomberg Global Aggregate Unhedged Total Return Index is a benchmark that measures the value of global investment grade debt. It includes fixed-rate bonds from developed and emerging markets and is reported in US dollars.
The NASDAQ Composite is a stock market index of the common stocks and similar securities listed on the NASDAQ stock market, and itis highly followed in the U.S. as an indicator of the performance of stocks of technology companies and growth companies.
A consumer price index(CPI) measures changes in the price level of a market basket of consumer goods and services purchased by households.
Bloomberg's World Interest Rate Probability (WIRP) function is a chart that shows the probability of different interest rates for the US benchmark rate. The chart is based on interest rate caps and floors, as well as options on Treasury futures.
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