Markets Rose In January Despite Volatility, but More Bumps May Lie Ahead
So, Punxsutawney Phil, the famous forecasting groundhog, says we’ll have six more weeks of winter. But how many more weeks of market volatility can we expect? That’s the most important question, and the answer lies in examining the sources of investor unrest in January.
One source, certainly, was the new president, whom we already knew had the potential to say and do things that might stir up the markets. Remember, the markets like steadiness and certainty. They don’t like surprises. So, when the White House press secretary announced on Friday, January 30 that, “The president will be implementing tomorrow 25% tariffs on Mexico, 25% tariffs on Canada and a 10% tariff on China,” Wall Street reacted, with all three major indexes posting losses. Although investors knew proposed tariffs were likely at some point, the announcement less than two weeks after Inauguration Day was unexpected.1
The markets sank even lower when they reopened Monday but rebounded on Tuesday after the president announced a delay on tariffs against Canada and Mexico, which came after both countries agreed to work with the U.S. on illegal immigration issues. This announcement eased fears of an all-out trade war… for now, anyway.2
But tariffs weren’t the only source of volatility last month. The emergence of China’s new DeepSeek artificial intelligence (A.I.) app sent U.S. tech stocks (Wall Street’s leading sector) tumbling and spawned a new source of investor nervousness.3
Still in the Red
Despite this turbulent start to the year, stocks still managed to end January higher thanks mainly to strong earnings. The S&P 500 added 2.7% last month, while the Dow shot up 4.7%, and the Nasdaq rose by 1.6%.4
Still, the issues that rattled the markets in January are far from over. The delay on tariffs against Canada and Mexico, for instance, will last just 30 days, and the Chinese tariffs are still set to kick in sooner. What’s more, it appears likely that this administration is going to do more things that surprise the markets, the business world, and perhaps the world, in general. And regardless of where you stand politically, the fact is – once again – that the financial markets don’t like surprises or uncertainty.
With all that said, the economy remains strong. So, while it’s good to keep an eye on this kind of short-term volatility, there is also no need to stress over it. The last thing you want is to stress out needlessly to a point where you start thinking about making strategic investment changes based on short-term fluctuations rather than on your long-term needs and goals. That’s always a mistake. Keep things in perspective and know that the economy is still healthy, the markets are still at record highs, and the New Year is off to a good start for investors.
Another reason for this good start is that long-term interest rates have been fairly steady. The interest rate on the 10-year government bond started and ended January at around 4.5% after briefly spiking to just over 4.7% mid-month. It notched even lower to 4.4% in the first week of February.5 Again, that’s good, and there’s no reason to think the Federal Reserve is going to adjust short-term rates again or make any other moves that might drive up long-term rates.
Although inflation still isn’t quite down to the Fed’s target rate of 2%, it’s unlikely they will make any more adjustments just to hit that goal. Could that change if inflation starts spiking again? It’s possible but not likely, even though inflation is a growing concern again since it’s a well-known fact that tariffs can lead to higher prices on many products.
Selective Inflation
But it’s important to understand that, while tariffs can affect consumer prices, they don’t always. For instance, when it comes to a 10% tariff, many large companies will absorb the burden internally and avoid shifting it to consumers. But that’s rarely possible when it comes to a 25%-or-higher tariff. Consumers likely will feel the effects of those if they’re eventually levied.
But it’s also important to remember that higher prices caused by tariffs are far different from across-the-board inflation. When the cost of just about everything is rising, consumers have little choice but to bite the bullet and pay more. But with tariffs, where only certain products or brands are affected, you have other options. You can switch brands, choose products imported from non-affected countries, and so forth.
The point is that even if all these tariffs move forward and consumer costs rise here and there, it seems unlikely the Fed will get involved in any way that could have a major impact on interest rates. With general inflation that often happens, yes, as we saw throughout 2022; but with this kind of selective inflation, it’s probably not a concern.
So, once again, despite January’s volatility and the possibility of more to come, the year is off to a strong start for investors. As for our accounts, most of our portfolios of bond and bond-like instruments rose in value by about 2% in January, as you’ll see in your latest statement. This is an average, of course, and since our portfolios are all customized, your own increase may be a bit higher or lower depending on your individual holdings and the specific strategy you’re using.
Of course, the most important item to pay attention to in your statement when you’re investing for income first and growth second is your interest and dividend return, which is always consistent regardless of any fluctuations up or down in the values of your holdings. That, of course, is the reason you’re invested for income first and growth second, and why you can remain confident about your income return regardless of how many more weeks – or months – of market volatility may be in store!
1 “Stock Market News, Jan. 31, 2025,” Wall Street Journal, Jan. 31, 2025
2 “Stock Markets Rattled by Possible Tariffs, and the Volatility Isn’t Over,” Pittsburgh Post Gazette, Feb. 4, 2025
3 “DeepSeek Users in US Could Face Million-Dollar Fine and Prison Time,” The Independent, Feb. 5, 2025
4 “Stock Market on Jan. 31, 2025,” MarketWatch, Jan. 31, 2025
5 MarketWatch.com
Investment Advisory Services offered through Sound Income Strategies, LLC, an SEC Registered Investment Advisory Firm.