New Year, New Market?

A new year tends to bring forth the prospect of a new beginning for many of us – a chance to reset, and possibly, change course. That spirit of renewal seemed to extend to the stock markets in January, with new leading areas emerging.

The Nasdaq and S&P 500 indices were the clear benefactors of the mega technology companies dominating equity performance for the past two years. But as we stepped into the new year, a new market landscape began to appear. The chart below shows that foreign stocks and the Dow have slipped into the lead early on in 2025 and by very comfortable margins. Nasdaq, the darling of 2023 and 2024, has been relegated toward the bottom, not much better than high yield bonds!

While there’s no guarantee that the market leaders in January will maintain their top spots through the rest of year, it’s interesting to note that the leaders of 2024 (Nasdaq and S&P 500) were also the leaders in January of last year. Nevertheless, to understand why the change in leadership has taken place, it is helpful to review the main events in January that spurred the shift out of a handful of names in the “Magnificent 7” and into other areas of the stock market.

While there’s no guarantee that the market leaders in January will maintain their top spots through the rest of year, it’s interesting to note that the leaders of 2024 (Nasdaq and S&P 500) were also the leaders in January of last year. Nevertheless, to understand why the change in leadership has taken place, it is helpful to review the main events in January that spurred the shift out of a handful of names in the “Magnificent 7” and into other areas of the stock market.

A Bifurcated Month 
January gave investors two distinct market environments: a negative first half and a positive second half. Both stocks and bonds struggled in the first half of the month as the traditional Santa Claus rally failed to materialize for stocks and bonds were hindered by rising interest rates. The S&P 500 and Nasdaq, though down, held up better than the Dow and small stocks. Around the middle of the month, however, this dynamic flipped, with the Dow and small stocks starting to lead as equity markets surged on tame inflation reports and perceived favorable economic policy announcements coming from the new administration. But the real market-moving news took place in the last two weeks of the month, and with it, increased volatility:

  • Joint venture “Stargate” announced by the new Trump administration on January 21. As reported by CNBC, this is a $500B AI (artificial intelligence) infrastructure investment project backed by Oracle, OpenAI, and Softbank for the buildout of data centers. This news boosted the shares of technology partners in the AI space, but the initial euphoria in the AI names fizzled out as the month wore on.
  • The January 27th announcement that the Chinese startup “DeepSeek” possibly has a competitive AI model that performs better than rival current models and at a lower cost sent technology stocks reeling as investors rotated out of them and into defensive areas of the stock market.
  • The Federal Reserve left rates unchanged on January 29 amid a cautious stance that inflation remained elevated, leaving markets with the prospect of higher interest rates for longer.
  • Threat of tariffs by the Trump administration on January 31 had markets on edge going into February, with the prospect of a trade war with China, Canada, and Mexico.

Changes to Portfolios in January
Overall, adjustments made to the portfolios in January were on the lighter side and driven more by individual positions triggering the FSA Safety Net® rather than by how the overall markets were behaving. Cash raised was reinvested into areas of the stock and bond markets exhibiting strength, including broad equity exposure outside of the “Magnificent 7.” The S&P 500 did give investors a normal 5% pullback in mid-January. Any further weakness from there would have prompted the investment team to begin taking steps to defend the portfolios across the board.

Please remember to inform your advisor of any changes in your life that might affect your investment objectives and how we manage your money.

Mary Ann Drucker
Assistant Portfolio Manager

Disclosures are available at www.fsawealthpartners.com/disclosures/market-update.

FSA’s current written Disclosure Brochure and Privacy Notice discussing our current advisory services and fees is available at www.fsawealthpartners.com/disclosures or by calling 301-949-7300.

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