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January 27, 2025

“The person that turns over the most rocks wins the game.”

Peter Lynch

 

Speaking of Games, yesterday’s playoff determined who goes to the big dance. Why do we care? Because the Super Bowl winner has reliably determined the years market direction, depending on if the NFC or AFC wins. Chiefs (AFC) have won the past two years, how was the market? Anyway, U.S. stocks finished lower on Friday, but all three major benchmarks ended the week with gains. Here are the numbers, for the week, things were pretty good. The S&P 500 added 1.77%, Dow Jones Industrial Average led up 2.57%, the Nasdaq gained 1.53%. Internationally, the FTSE 100 was flat off a paltry, at 03%, and the MSCI-EAFE added .17%. The 2 Year treasury paid 4.251% and the 10-Year yield was 4.579%.

Equity markets started the week on a solid footing, rising about 1% at the session’s high. The move comes the day after President Donald Trump’s inauguration as the 47th president. His first days in office were marked by significant administrative changes intended to invigorate corporate growth. The risk is the impact of tariffs, but the results have yet to be seen. Using the first administration as an example, investors should prepare for market volatility but an upward trend.

Last week President Donald Trump “zoomed” before business leaders assembled in Davos, delivering his America First message and spoke about tariff plans only in general terms, said he would ask Saudi Arabia and its allies to help lower oil prices, and called for interest rates to “drop immediately. But overall, the globalist group had to swallow hard because there is definitely a change in US economic policy.

Speaking of Davos, Jamie Dimon has built a reputation as something of an economic doom-monger in recent years, but the JPMorgan CEO has had a reboot. During an interview at, the World Economic Forum conference at Davos, Switzerland, Dimon let it be known that anyone worried about tariffs should “get over it.” But, if anything, investors should be taking the risks more seriously. “If it’s a little inflationary, but it’s good for national security, so be it,” He suggested tariffs could be an economic weapon if used effectively and can be used to bring people to the negotiating table.

What’s the Fed up to? The FOMC’s January policy meeting is on Tuesday and Wednesday, with the statement slated for Wednesday afternoon. There is nearly 0% chance for the Fed to cut rates or change policy at this meeting but a 100% chance for the committee to impact the outlook for rates. From Market Watch, “after the Fed delivered a percentage point of rate decreases in the final four months of 2024, further cuts appear to be on hold for now—no matter Trump’s preference. Stalling progress on reducing inflation paired with a resilient economy presents little urgency for near-term cuts, Fed officials have explained recently. Most policymakers still expect lower interest rates—though not much lower—by the end of 2025. The median forecast in the FOMC’s December projection called for a half-point decrease this year, followed by another half-point of cuts in 2026. Interest-rate futures market pricing implies the greatest odds of just one quarter-point rate cut in 2025.

Inflation will need to resume its deceleration first. It’s a “data-dependent” Fed, to quote many officials’ favorite mantra of late. Meanwhile, the totality of Trump’s policy proposals—including on immigration, trade, taxes, and deregulation—appear most likely to boost growth and inflation, potentially arguing against lowering rates. Trump’s comment on the Fed and monetary policy is nothing new. During his first term in office, Trump frequently jawboned Chairman Jerome Powell—who Trump nominated for the role—and publicly discussed replacing him. During the 2024 presidential campaign, Trump said he wouldn’t seek Powell’s ouster before his term ends in May 2026.”

This week is key for earnings season, as four of the “Magnificent Seven” tech companies will report quarterly results. Microsoft Corp, Meta Platforms Inc., Tesla Inc. will report this Wednesday, and Apple Inc. will report on Thursday. Investors will be looking to those earnings to see if the artificial-intelligence boom, which has fueled the latest bull market, is wavering. Meanwhile, the Federal Reserve will hold its first policy meeting of the year. While the Fed is expected to hold interest rates steady, investors will be looking for important updates on inflation and the potential fallout of tariffs from the Trump administration.

We added a little Crypto, some more large cap, and will hold our small cap exposure. Small caps appeared set up for success in early November. The Russell 2000 ripped higher as the election results came in, gaining 7% the next day and nearly 11% for the month! Investors became optimistic about deglobalization and the onshoring of manufacturing, plus we were officially in a rate cut cycle, which typically favors small caps over large. And the valuation disconnect between large caps and small caps had hit record highs after a decade of large trouncing small. We believe small caps are due for a period of outperformance relative to large caps, for three specifics reasons. There is an extreme disconnect between small cap and large cap valuations, although its length is uncertain, we are still in a rate cut cycle, which has historically benefited small caps, and finally, Deglobalization and onshoring should support smaller US companies.

So, what happened, why did they drop at the end of the year? When inflation data came in hot in December, the Federal Reserve turned hawkish, suggesting inflation was re-emerging and there would likely be fewer rate cuts than expected. Small caps immediately reversed course and finished December down a whopping 8.2%. So now the sector is recovering nicely.

Just a word on international, we have trimmed positions but, we believe that last week’s data points underscore the mixed recovery across global economies, with inflation, labor conditions, and central bank policies taking center stage, so we held on to some not completely abandoning the position.

In other significant developments, the number of people who applied for U.S. unemployment benefits in mid-January climbed to a six-week high due to a temporary surge in California because of the massive wildfires ravaging the Los Angeles area.

U.S. existing-home sales fell in 2024 to the lowest level in 30 years, as high mortgage rates and low housing inventory weighed on home-buying activity. Buying a home has been a tough sell with mortgage rates at 7%. Home prices have also relentlessly marched upward, making it difficult for people to afford to buy a home.

Finally, it looks like the Republicans are staying together as President Trump seems to be getting his team placed. After Marco Rubio and John Radcliffe breezed through the process, last week, the Senate confirmed South Dakota governor Kristi Noem yesterday as Secretary of Homeland Security by a 59-34 vote. She will oversee border security, immigration, emergency response, and other duties. ‌  ͏ ‌  ͏ ‌  ͏ ‌  ͏ ‌  ͏ ‌  ͏ ‌  ͏ ‌  ͏ ‌  ͏ ‌  ͏ ‌  ͏ ‌  ͏ ‌  ͏ ‌  ͏ ‌  ͏ ‌  ͏ ‌  ͏ ‌  ͏ ‌  ͏ ‌  ͏ ‌  ͏ ‌  ͏ ‌  ͏ ‌  ͏ ‌  ͏ ‌  ͏ ‌  ͏

The Senate also confirmed Pete Hegseth as the nation’s Secretary of Defense late Friday after Vice President JD Vance cast the deciding vote to break a 50-50 tie, with some strong words and looks at former GOP leader Mitch McConnell and Republican Senators Susan Collins and Lisa Murkowski who voted against the nomination, along with all Senate Democrats. More fireworks expected this week as Democrats are trying to obstruct and pick off some identified Republicans who don’t like the president.

 

Mike