January always seems like a long and winding road (ie: month), doesn’t it? I’m not sure if it’s the post-holiday contrast, the lack of daylight, the harshness of winter, the 31 days, or a combination of all of those factors but somehow, the month always seems to move a bit slower than others.

However, this year, January was a very eventful month for investors, markets, and the world as several big events took place (most of which seemed to come in the final days). Let’s take a quick look back at January – and a look ahead based on how markets did to start the year

January Returns

If you have been away from news outlets all month and look at market returns, you’ll see that January ended up being a pretty good month. Fixed income returns were modest as rates rose slightly (Barclays Agg Index rose 0.5% on the month) but US equity returns were nicely positive (S&P 500 rose 2.8% for the month). Top sectors were communication services, health care, and financials and the only negative sector was technology (see DeepSeek comments below). Yet, as many of you know, there was quite a bit of volatility beneath the surface

DeepSeek Jitters

Artificial intelligence has dominated market narratives for well over a year. Many US companies (such as Nvidia, Broadcomm, Microsoft, and others) have achieved stratospheric returns given these trends. There seemed to be no limit to the investment and excitement over this technological pivot point. However, in late January, markets woke up on a Monday to find a chill had spread over US equity markets as an AI competitor emerged.

A Chinese company (named DeepSeek) released its own AI model (R1) and it quickly became the top app on the Apple App Store. It was a open source model, allowing others to closely examine what they had put together. Most shockingly, DeepSeek claimed it trained the models for only $5.6 million which stands in stunning contrast to the cost spent to build out US models (for instance Open AI’s Chat GPT cost more than $100 million to train, while future models are expected to push past $1 billion). This seemed to challenge the narrative that the ongoing spending on AI infrastructure, energy, and data centers would in fact materialize.

We will see where things go from here. But keep in mind there are important caveats. DeepSeek’s headline figure doesn’t include research and development costs and various other expenses The cost may not be $100 million – but it’s likely not $5.6 million either. Second, smaller models like DeepSeek are unlikely to exist without larger models. It’s probable that this model trained off of the existing larger models (like Chat GPT), allowing them to reach scale in less time and for less cost. There are likely to be concerns about this misappropriation of data moving forward. Third, there are already warnings and concerns about reliance on a Chinese controlled model. Look at the fuss over TikTok – I’m sure concerns will soon rise over DeepSeek. Lastly, there are now stronger restrictions on US chip exports to China. DeepSeek had relied on powerful Nvidia chips to build R1 and moving forward, they will need to be far more reliant on Chinese hardware which may limit their potential from here.

All this to say, markets overreacted to the news and many names have mounted meaningful recoveries since then. The AI story will continue to evolve and investors need to pay attention to the ever changing landscape.

Federal Reserve’s Pause

Not much happened at the Federal Reserve’s first meeting of 2025. The Fed opted to pause, holding the Fed Funds rate steady at 4.25 – 4.5%. The changes in the Fed’s statement got market’s attention as they edited their statement on inflation as follows: Inflation has made progress  toward the Committee’s 2 percent objective remains somewhat elevated.”  Fed Chairman Powell was quick to note that it was just a little language clean-up. However, this slight change appears to be evidence that there are certainly members of the Federal Reserve that believe inflation risks are skewed to the upside (likely due to the looming fears over tariffs as well as memory of the spike in inflation in Q1 2024).

The Federal Reserve is keeping their options open and avoiding boxing themselves in to future actions as this year unfolds. It seems clear that more cuts are coming as Powell stated we “remain meaningfully above the neutral rate” – it’s just a matter of when. As always, it will depend on the data. In our view, growth may trend slightly lower and inflation is likely to surprise on the downside (especially if the tariff talk proves to be more bark than bite). One or both of these will likely lead to more Fed easing which should prove to be good news for equities and fixed income. In our view, you can expect more cuts, not less – just be patient.

Tariff Threat

During the final weekend of January, President Trump issued new tariffs against Canada, Mexico, and China. The tariffs were messaged more as a drug war versus a trade war (as the motivation for these policies was communicated as tactic to help stop the flow of fentanyl into the US).

Markets reacted swiftly to the news Monday morning but by mid-day, both Canada and Mexico announced negotiations with President Trump that resulted in a 30-day delay on any tariffs, and markets stabilized. While it remains to be seen what will happen in the coming weeks, for now, markets have sluffed off concern over tariffs within North America. The tariffs on China did in fact take effect. It’s clear that President Trump will continue to “flood the zone.” However, it’s just as clear that he remains highly aware of public and market reaction to his actions. Keep that in mind and be aware of the likelihood of more volatility (and trading opportunities) as the next 4 years progress.

January Indicator

There is an old adage in markets that says “as January goes, so goes the year ” – meaning that most of the time, the stock market moves in the same direction in January as it does for the following 11 months.

Since 1928, when the S&P 500 has had a positive return in January there is an 80% chance it will be up for the year. When the market is down in January there is an 55.6% chance it will be down for the year.”

January was a positive month. Take that for what’s it is worth. Since 1928, the S&P 500 has had a positive full-year return the majority of the time (71 out of 97 years, or 73%). So regardless of January’s results, you have a pretty decent chance of seeing a positive annual return (every 3 out of 4 years). Could a strong January increase those odds a bit? Perhaps. Could it be meaningless? Perhaps. Either way, our advice remains the same as it always has been and always will be. Diversify, monitor, breath in, zoom out, and stay invested over the long term.

Onward we go,