January 2025 Commentary

January marks a time of new beginnings, and this year, it brings a new administration determined to reverse the past four years of increasing regulations, government spending, and relative executive inaction. As President Trump re-entered the White House for his second term, markets anticipated swift policy shifts similar to those in 2016. However, the speed and persistence of the new administration’s actions exceeded expectations. Heightened market volatility, a surging U.S. dollar, and escalating trade tensions left investors navigating rapid and unpredictable policy changes.

Further turbulence arose when DeepSeek, a Chinese hedge fund-backed startup, unveiled a competitor to OpenAI’s ChatGPT-7. The announcement triggered a sharp selloff in technology stocks, with losses rippling across multiple sectors. The Nasdaq-100 alone shed over $1 trillion in market value. However, the panic-driven reaction had a silver lining, market broadening beyond the Magnificent Seven, with more companies closing positive than negative. Despite DeepSeek’s claims of training the model in just two months at a cost of $6 million, details on its methodology remain opaque, leaving questions about its credibility. What remains clear is that AI is still in its early stages, and the demand for critical hardware, ranging from Nvidia’s chips to data center infrastructure and power suppliers, continues to expand as AI development intensifies into an arms race.

Amidst the uncertainty, economic fundamentals remain steady. Labor market data continues to reflect a healthy employment environment, inflation remains near the Federal Reserve’s target, and corporate earnings remain a key driver of long-term market conditions. Additionally, the resilience of the U.S. economy is further bolstered by tenuous macroeconomic trends abroad.

The U.S. job market remained a key pillar of economic strength in 2024. Unemployment has continued its decline from its peak in July, now hovering just above 4%. While concerns over federal spending cuts and their potential impact on employment—particularly given the rapid expansion of government hiring during the Biden administration—dominate headlines, a closer examination of public and private sector employment dynamics offers valuable insights.

The Employment Cost Index, which tracks wage growth across sectors, showed year-over-year increases of 3.7% in the private sector and 4.5% in the public sector. Despite heightened union activity in the private sector throughout 2024, faster wage growth in the public sector has contributed to talent competition, potentially crowding out private employers. However, recent job market data suggests resilience as 256,000 jobs were added last month, the highest figure since March 2024, signaling both labor market strength and rising business confidence. While some analysts warn that federal job cuts could weigh on economic growth, a more competitive labor market, combined with strong hiring sentiment from private businesses, has historically been a positive indicator. Notably, the proportion of new jobs in the public sector relative to the private sector has steadily declined over the past six months. Private education and health services led job creation in 2024, adding nearly one million new positions, more than twice the number added in the public sector.

Inflation remains a primary concern for consumers as prices for food, energy, and housing continue to capture attention. While the Federal Reserve’s preferred inflation gauge, the Personal Consumption Expenditures (PCE) Index, offers a broader measure than the Consumer Price Index (CPI) by accounting for expenditures from households, nonprofits, and the government, it saw a modest rebound, rising to 2.6% from October’s low of 2.3% on an annualized basis. With the Fed’s 2% target within reach, the prospect of federal spending cuts may further support disinflationary pressures in the months ahead.

A closer look at December’s data reveals the sharpest monthly increase in gasoline and energy goods prices in over two years, rising 4.2%. This surge was a significant factor in the uptick away from the Federal Reserve’s 2% inflation target. However, markets largely shrugged off the increase, anticipating that the new administration’s push to expand domestic energy production will help stabilize prices, though the impact of new drilling efforts will take months to materialize.

Given the labor market’s resilience and the modest rebound in PCE inflation, the Federal Reserve unanimously opted to maintain interest rates at the January FOMC meeting, in line with market expectations. However, uncertainty remains regarding the path of rate cuts in 2025. The CME FedWatch Tool reflects a divided market outlook: futures pricing indicates an 11% probability of no rate cut, a 30% chance of a single 25-basis-point cut, a 33% probability of two cuts, and a 26% likelihood of three or more cuts. This divergence underscores both investor uncertainty and skepticism toward the Fed’s own projections, which currently anticipate two rate cuts totaling 50 basis points for the year.

Although the stock market has pulled back from December’s highs, economic indicators continue to signal a generally bullish outlook. The Conference Board’s Leading Economic Index (LEI), a composite of key indicators such as jobless claims, manufacturing hours, stock prices, and consumer confidence—suggests underlying economic resilience. In December, the LEI edged down by 0.1% to 101.6, reflecting a 1.3% decline over the second half of 2024, a slight improvement from the 1.7% decline recorded in the first half of the year. This moderation follows a 0.4% increase in November and is primarily attributed to weaker consumer confidence, subdued manufacturing orders, and a decline in building permits.

Historically, the inauguration of a new president from an opposing party tends to create cautious consumer sentiment, particularly when the administration signals potential tariff policies. Additionally, the decline in building permits has been influenced by persistently high 30-year fixed mortgage rates above 7%, regulatory hurdles, and the possibility of tariffs that could drive up construction material costs. Despite these challenges, half of the index’s ten components contributed positively in December. Furthermore, the LEI’s six-month and twelve-month growth rates showed less negative trends, indicating a moderation in economic headwinds and a more stable outlook for U.S. economic activity.

With a constant barrage of White House announcements, ranging from new tariffs and federal program cuts to executive orders, market anxiety is a natural reaction. Heightened volatility tempts immediate responses, and even the most seasoned Wall Street analysts can be swept up in the frenzy of short-term market movements. Yet, as Warren Buffett famously said, “Predicting the rain doesn’t count. Building an ark does.” This philosophy underscores how we have designed our model portfolios in preparation for President Trump’s return to office.

In many ways, wealth management is like meteorology. Weather forecasting relies on vast datasets and multiple models, each with its own strengths, some excel at predicting short-term conditions, while others focus on long-term climate trends. Despite the sophistication of these models, local forecasts often miss the mark on precipitation totals, timing, or temperature. Similarly, financial markets are complex and unpredictable, particularly at a granular level. Just as a meteorologist wouldn’t base a seasonal outlook on a single storm, we don’t attempt to react to every tariff announcement or policy shift, especially when they can be altered or reversed behind closed doors. Instead, we focus on long-term economic patterns, much like the NOAA assesses El Niño and La Niña to determine broader climate trends.

We have strategically positioned portfolios to mitigate market shocks, such as the recent turbulence caused by DeepSeek, while capitalizing on enduring secular trends. Rather than speculating on which AI model costs less to train or reacting to short-term policy moves, we prioritize companies that will drive AI profitability and the critical infrastructure supporting data centers and hyperscalers. These foundational trends will shape the market long after today’s storms have passed.

As we move into February, we remain focused on monitoring economic data as it is released. The full impact of President Trump’s policies will take months to materialize, and we continue to refine our portfolios accordingly, leveraging periods of volatility to optimize entry and exit points across our models.

Looking back to 2016, when Trump first took office, markets experienced heightened volatility through the first quarter before rallying strongly through October 2018. While past performance does not guarantee future results, the strength of economic data and continued corporate earnings growth provide a solid foundation for confidence in the long-term outlook.