January Barometer: Mirage of Magnificent 7

"If everyone is thinking alike, then somebody isn’t thinking." -General Patton

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?The January Barometer, a storied market maxim suggesting that "as January goes, so goes the year," is a bold prediction rooted in trends and sentiment. After December fizzled and the Santa Claus rally was a no-show, the S&P 500 clawed its way back into positive territory last week following an almost 5% correction.?

January 2025 has tossed tradition aside, with heightened volatility stemming from the lingering effects of past inflation and Fed policy headwinds and uncertainty surrounding future Trump-era policies. This mix of unresolved challenges and speculative outlooks has flipped the script, keeping investors on edge as they navigate uncharted terrain.?

While such market anomalies may have held water in the past, their reliability has waned over time. Predictive tools like the January Barometer, once boasting a 75% success rate, now hover closer to a coin flip in accuracy. Investors would do well to treat these market quirks as curiosities, not cornerstones of their financial strategy or shortcuts for predicting the market's next move. Following the herd and thinking like everybody else or reacting impulsively to ominous expert predictions by the financial media can quickly land you in hot water.

Driving Volatility?

Volatility stems largely from shifting Fed expectations. Investors betting on deflation and rate cuts got a wake-up call when December’s stronger-than-expected jobs report hit, signaling the Fed might pump the brakes on cuts. Now, the market anticipates just one rate reduction this year, possibly the cycle’s last. Suddenly, “good news” is bad news for stocks, with rate-sensitive sectors feeling the brunt of this valuation recalibration.?

Meanwhile, tech stocks led by the “Mag-7”, and buoyed by AI’s promise, have soared like it’s the late ‘90s all over again. Generative AI has undeniable potential, but investor enthusiasm has seemingly outpaced near-term profits. Reality checks on earnings expectations have sparked corrections, forcing a more tempered outlook. Compounding this is the concentration risk in major indices—tech behemoths dominate benchmarks, leaving markets vulnerable to swings from a handful of stocks.?

The volatility trifecta—Fed policy uncertainty, overheated AI-fueled tech stock valuations, and over-concentration in mega-cap stocks—has made this January a bumpy ride, challenging time-tested patterns like the January Barometer and January Effect.?

Where Good News is Good News?

December’s stronger-than-expected jobs report highlights the resilience of the economy, suggesting it may need less intervention from the Federal Reserve in the form of lower interest rates. Currently, the market anticipates just one rate cut in 2025, which could mark the final adjustment of the cycle. However, as 2024 demonstrated, these expectations can pivot rapidly in response to new data.?

Jon here: The economy appears poised to keep growing while cooling just enough to maintain inflation at manageable levels. This "no landing" scenario, where economic growth avoids a steep slowdown, could be the optimal outcome as we enter the third year of the current bull market. Despite heightened market volatility, the risks of slipping into recession remain low, and we’re a far cry from the sky-high rates of the early 1980s before Reaganomics took root.

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