“The four most dangerous words in investing are: this time it’s different.” – Sir John Templeton
After a very good 2024 for many investors, January continued the upward trend with all of the indexes we follow positive for the month. Included are not just the stock market indexes, but also commodities, bonds and the US dollar. This positive market action could bode well for 2025.
All data as of 02/03/2025, Source: Wells Fargo Investment Institute. An index is not managed and not available for direct investment. Past performance is not a guarantee of future results. [Wells Fargo Investment Institute, Inc. is a registered investment advisor and wholly-owned subsidiary of Wells Fargo Bank, N.A., a bank affiliate of Wells Fargo & Company.]
Belief in the January Barometer is the belief that stock market performance in the month of January foretells the performance for the rest of the year. First devised by Yale Hersch in the Stock Trader’s Almanac in 1972, we find it hard to tell if there is really something there or a secondary effect of the upward bias of US equity index returns. Regardless, 2025 is off to a good start for investors.
The “stock market” is really a market of stocks. What this means is the returns of a specific stock market index is a compilation of the individual companies that the index represents. The S&P 500, for example, moves higher or lower based on the performance of the 500 companies it represents. Because it is market cap weighted the larger the company the higher its influence of the index level.
We bring this up as we saw some very interesting trends in January that, if more than a short-term phenomenon, could be a change in the markets. After years of growth stocks outperforming value stocks, the trend this month reversed itself. The Information Technology sector has been dominant for more than a decade. In January financials, communications services, and health care were the leaders.
As we write these words on February 4, 2025, we are confronted with the reality that stock market performance is not just about how good a company’s management team is or its past earnings powers. Corporate America doesn’t exist in a vacuum but in the real world. In the real world, there are multiple factors – many of which are not in the control of corporate management -that will affect how individual companies, and the market indexes perform.
Chart #1: www.stockcharts.com Data 09/01/21 – 01/31/25 as of 02/03/25. An index is not managed and not available for direct investment. MA 50 = 50-day moving average MA 200= 200-day moving average. Past performance is not a guarantee of future results.
Global Trade and Trade Wars
The original intent of this month’s commentary was to overview the factors we thought were the most relevant to the markets over the next few years. We will get to that, but not this month. News over the first weekend of the month changed those plans. We are now confronted with the factors that may be relevant in the next few months.
On Friday January 31, 2025, POTUS announced new tariffs on our largest trading partners – 25% on Canada, 25% on Mexico, and 10% on China. Over the weekend, POTUS stated publicly that tariffs on the European Union (EU) are “definitely” coming.(1) Needless to say, both US and global markets showed concern. Fortunately, after POTUS spoke with Mexican and Canadian leaders the tariffs were given a 30-day reprieve. The 10% tariff on Chinese-made goods, on the other hand, has become policy. At this point in time, we believe the major concern is not about the renegotiating of trade deals, but the growing likelihood of an extended trade war.
While we do not believe that 25% across-the-board tariffs are the likely outcome of trade talks with our neighbors, we feel it is important to consider the possibility the worse-case scenario becomes reality at some point in the future. An extended trade war – 30 days from now or at some point in the next few years – would be bad for all parties involved. More than likely, we believe it would be short-term negative for the stock market. As of this writing, we view this worse-case scenario as a possible but not probable outcome.
Instead of thinking about what is happening today as a one-off, resolvable issue, we think of this as the beginning of a longer-term change in policy. We believe that this is just the first in a series of trade-related events that are now a part of the global economic background. For anyone who has paid attention to Donald Trump over the past decade it should be obvious he is a fan of tariffs. He likes tariffs for revenue to the Government, tariffs as a negotiating tool, and tariffs as a tool to wield American economic power.
The playbook looks fairly simple: make big threats and extract concessions from trading partners. It can work, for sure, but there are no guarantees. We found this out during Trump’s first term as POTUS when China hit back with not just tariffs, but by shifting the purchase of wheat and soy from US farmers to Brazil and other providers. Not only did the US Government have to bail out farmers at the time, but sales to China never returned to pre-trade war levels. Also, almost immediately after Trump won reelection, China began to prepare for an escalation of trade issues.(2)
Beyond the possible negative effects on US farmers, we see number of other problems that can result in using tariffs as a tool. The obvious one, we think, is that there does not appear to be a well thought out desired policy outcome on the part of the United States. Canada, for example, entered the first week of February unsure of what specific policy changes were expected. Will this be any different a month from now when the current 30-day delay is over? We are skeptical.
Some or all the cost of tariffs will likely get passed through to the US consumer. We have heard some talking heads justify the increase costs as just a “one-time” increase, so any related costs passed through to consumers isn’t a long-term inflationary problem. This is true, but not a very strong argument. Once the price of something increases it almost never goes back down. Thus, adding $10 to the cost of a pair of shoes in 2025 will most likely remain at that level in 2026 and beyond.
Beyond the possible negative economic consequences for parts of the economy and inflationary pressures, we really do not believe that tariffs can be all things. If POTUS decides to put across the board tariffs on goods from some or all of our trading partners as a way to increase revenues for the Federal Government, you cannot then use these tariffs, and the revenue expected from them as a negotiating tool to extract concessions from our trading partners. Why? If you negotiate away the tariffs you negotiate away the expected revenue stream to the Federal Government.
How to Invest in an Unsure Environment
The current investment environment may feel unusual, but uncertainty is a part of being an investor. The stock market has managed to do well in war time and peace, through boom times and recessions. We came out of the other side of the “Tech Wreck” of the early 21st Century to new all-time highs on the Dow and SP& 500. Do you remember the Great Recession in 2008? We do.
For some people the first instinct may be to want to make drastic changes to portfolio allocations with little or no consideration to how the changes can affect long-term investment returns. In our experience, making asset allocation changes based on short-term market fluctuations can often do more harm than good. The primary issue lies in the inherent unpredictability of markets in the short-term. Attempting to time the market by reallocating assets based on immediate economic concerns can lead to costly mistakes, it is nearly impossible to predict the exact top and bottom of market cycles. In our experience, this kind of reactive investing tends to erode the overall investment performance.
A disciplined, long-term investment approach that is based on your investment plan and financial needs, that sticks to a well thought out asset allocation plan, is generally more effective in achieving sustainable growth and financial stability.
Final Thoughts
We believe that the stock market moves in long-term cycles, shifting from secular bear markets to secular bull markets. The change in overall direction occurs every 12-18 years. The secular bull markets have coincided with big changes in the world – industrial revolutions. The bull market of the early 20th century was driven by the move from an agrarian society to a more urban society. Railroads and autos, in part, drove economic progress. Post-World War II economic expansion was driven by the development of the US interstate highway system and the housing boom. The bull market that started in 1982 had everything to do with computers. Today’s bull market is all about technology and AI producing greater productivity.
In our opinion, 2025 could be one of those years where investing doesn’t feel good. More volatility and uncomfortable moments appear to be a part of the current investment background. It doesn’t mean that the high-quality corporate earnings will weaken. Nor does it mean economic woes. And it certainly doesn’t mean that we are moving to a secular bear market. It just is what it is.
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Wells Fargo Advisors Financial Network did not assist in the preparation of this report, and its accuracy and completeness are not guaranteed. The opinions expressed in this report are those of the author(s) and are not necessarily those of Wells Fargo Advisors Financial Network or its affiliates. The material has been prepared or is distributed solely for information purposes and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy. Additional information is available upon request.
Asset allocation and diversification are investment methods used to help manage risk. They do not guarantee investment returns or eliminate risk of loss including in a declining market.All investing involves risks including the possible loss of principal invested. Past performance is not a guarantee of future results.
Index returns are not fund returns. An index is unmanaged and not available for investment.
Dow Jones Industrial Average: The Dow Jones Industrial Average is a price-weighted index of 30 “blue-chip” industrial U.S. stocks.
S&P 500 Index: The S&P 500 Index consists of 500 stocks chosen for market size, liquidity, and industry group representation. It is a market value weighted index with each stock’s weight in the Index proportionate to its market value.
S&P Midcap 400 Index: The S&P Midcap 400 Index is a capitalization-weighted index measuring the performance of the mid-range sector of the U.S. stock market, and represents approximately 7% of the total market value of U.S. equities. Companies in the Index fall between the S&P 500 Index and the S&P SmallCap 600 Index in size: between $1-4 billion.
S&P Small-Cap 600 Index: The S&P SmallCap 600 Index consists of 600 domestic stocks chosen for market size, liquidity (bid-asked spread, ownership, share turnover and number of no trade days) and industry group representation. It is a market value-weighted index (stock price times the number of shares outstanding), with each stock’s weight in the index proportionate to its market value.
MSCI makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any MSCI data contained herein. The MSCI data may not be further redistributed or used as a basis for other indices or any securities or financial products. This report is not approved, reviewed, or produced by MSCI.
MSCI World Index: The MSCI World Index is a free float-adjusted market capitalization index that is designed to measure global developed market equity performance.
MSCI EAFE® Index: The MSCI EAFE Index is designed to represent the performance of large and mid-cap securities across 21 developed markets, including countries in Europe, Australasia and the Far East, excluding the U.S. and Canada.
MSCI Emerging Markets Index is a free float-adjusted market capitalization index that is designed to measure equity market performance of emerging markets.
The CRB (Commodity Research Bureau) Index measures the overall direction of commodity sectors. The CRB was designed to isolate and reveal the directional movement of prices in overall commodities trades.
Bloomberg Barclays U.S. Aggregate Bond Index: Bloomberg Barclays U.S. Aggregate Bond Index is a broad-based measure of the investment grade, US dollar-denominated, fixed-rate taxable bond market.
NASDAQ Composite Index: The NASDAQ Composite Index measures the market value of all domestic and foreign common stocks, representing a wide array of more than 5,000 companies, listed on the NASDAQ Stock Market.
Russell 2000® Index: The Russell 2000® Index measures the performance of the 2,000 smallest companies in the Russell 3000® Index, which represents.
U.S. Dollar Index (USDX) measures the value of the U.S. dollar relative to majority of its most significant trading partners. The index is similar to other trade-weighted indexes, which also use the exchange rates from the same major currencies.
Technical analysis is only one form of analysis. Investors should also consider the merits of Fundamental and Quantitative analysis when making investment decision. Technical analysis is based on the study of historical price movements and past trend patterns. There is no assurance that these movements or trends can or will be duplicated in the future.
Stocks offer long-term growth potential, but may fluctuate more and provide less current income than other investments. An investment in the stock market should be made with an understanding of the risks associated with common stocks, including market fluctuations.
Investing in foreign securities presents certain risks not associated with domestic investments, such as currency fluctuation, political and economic instability, and different accounting standards. This may result in greater share price volatility.
Investments in fixed-income securities are subject to market, interest rate, credit and other risks. Bond prices fluctuate inversely to changes in interest rates. Therefore, a general rise in interest rates can result in the decline of the bond’s price. Credit risk is the risk that the issuer will default on payments of interest and/or principal. The risk is heightened in lower rate bonds. If sold prior to maturity, fixed income securities are subject to market risk. All fixed income investments may be worth less than their original cost upon redemption or maturity.
Investing in commodities is not suitable for all investors. The commodities markets are considered speculative, carry substantial risks, and have experienced periods of extreme volatility. Investments in commodities may be affected by changes in overall market movements, commodity index volatility, changes in interest rates or factors affecting a particular industry or commodity. Exposure to the commodities markets may subject an investment to greater share price volatility than an investment in traditional equity or debt securities. The prices of various commodities may fluctuate based on numerous factors including changes in supply and demand relationships, weather and acts of nature, agricultural conditions, international trade conditions, fiscal monetary and exchange control programs, domestic and foreign political and economic events and policies, and changes in interest rates or sectors affecting a particular industry or commodity. Products that invest in commodities may employ more complex strategies which may expose investors to additional risks, including futures roll yield risk.
Robert I. Cahill, Partner Rob.Cahill@wfafinet.
Jonathan D. Soden, Managing Partner Jon.Soden@wfafinet.com
Robert Sweeney, Financial Advisor Bob.Sweeney@wfafinet.com
Jay Knight, Senior Account Administrator Jay.Knight@wfafinet.com