January Jitters: Highs, Lows and Tech Troubles
Join DWS' Chief Investment Officer Vincenzo Vedda and his team in this month’s Market Movers as they analyze the drivers behind recent events and discuss key trends that could shape the weeks ahead.
The last four weeks have certainly been eventful. Markets saw a sell-off in global bonds, with yields rising sharply. Equities, particularly in the eurozone, continued their strong performance from last year, as did gold, which crossed the $2,800/oz threshold. At the same time, uncertainty remained, not least due to the news surrounding DeepSeek, which unsettled AI-driven sectors. Trump's inauguration and subsequent policy decisions only added to the bumpy ride in January.
Winners and losers of the month
A chaotic start to the year leaves investors needing to take a deep breath – but, at least, they can take a break on a plump cushion of returns, as various equity indices hit new record highs.
What they have seen probably gives them a clear idea of what the rest of the year has in store. A hyperactive U.S. president who is constantly testing the limits of what is feasible and permissible; other heads of government who have to gauge whether to give in to Trump's ideas or oppose them; continuing uncertainty about whether the new regime’s policies will promote inflation and harm global trade. In Europe, meanwhile, the trade tariff fears risk lengthening the already long wait for a manufacturing industry turnaround.
All these January topics were more or less predictable. Not expected, however, were the shock waves that a relatively young and small company from China would trigger on global markets. The presentation of a slim AI model that could achieve similar performance to established models, with significantly less computing capacity and power consumption, disrupted many AI businesses. That this model was offered on an open-source basis was a further surprise. A preliminary conclusion is that there could be losers as well as winners within the AI sector. The losers may be concentrated on the hardware side. Another impact is that the spread of AI solutions and penetration could accelerate. Today's business models and competitive advantages could become outdated more quickly than expected in this dynamic market.
In our monthly Investment Traffic Lights we analyze what this macro outlook means for the various asset classes and regions. Click ?? below ?? to read the full report.
January has been as turbulent as some expected, given the handover of power in the U.S., and so far, it certainly seems that the new administration will keep investors on their toes for the rest of the year. Besides this, we are watching how inflation will perform on what are expected to be its last yards towards the levels central banks target. We believe that the recession risks for the U.S. for 2025 are below average, and with corporate earnings globally set to increase, markets should be cushioned.
We remain optimistic on equity markets for the coming 12 months but don’t believe we will hit our year-end targets without further setbacks, as the political landscape has become less predictable. Our positive stance will be challenged in the event of a deteriorating macro and earnings picture, escalating geopolitical tensions, or further rises in yields. Convincing corporate earnings and economic growth, a drop in valuations, and lower yields would justify a more optimistic outlook. That the U.S. AI space lost roughly USD 1 trillion in market capitalization in one day shows the dangers of the market’s high level of concentration and the fragility of the upswing. We have no regional preferences at this point.
Gold, at the same time, reached a new historic high in the final days of January, jumping above USD 2,800/ oz for the first time, helped by lower Treasury yields. This, together with steady demand across central banks and retail investors as well as fears about the new U.S. government’s fiscal discipline should continue to support prices and limit downside. Bigger upside moves would probably require some new catalyst, such as further geopolitical flare-ups or more aggressive ETF purchases from Western investors.
In our monthly Investment Traffic Lights we analyze what this macro outlook means for the various asset classes and regions. Click ?? here ?? to read the full Investment Traffic Lights report.
Like powerful winds fanning a wildfire, the prospect of Donald Trump in the White House stirred a storm in global bond markets at the turn of the year – and the distant UK bond market was particularly impacted by the storm. Quite why this should be the case is explored in our UK gilts in PAIN research piece.?
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U.S. and global bond markets were unsettled by Trump’s plans to impose higher import tariffs and, it would seem, cut taxes and press on with an expansionary U.S. fiscal policy. That global inflation has retreated more slowly than expected also worried the markets. UK inflation in fact surprised markets positively by coming down to 2.5% in December but weak government finances and little or no economic growth are more difficult and profound concerns to investors.
The UK’s economic policy problem is made still more complex by the fact that the new government committed itself to tight fiscal rules and also promised not to raise taxes. Unless the government amends its policy, spending cuts could be necessary – and that could further harm UK growth prospects.? That the rise in gilt yields was accompanied by a dive in the pound was a further alarming sign: It may reflect international skepticism on UK assets. Our research piece considers the UK’s tricky dilemmas and the prospects for its bonds. ?
Global bond markets, the source of the recent turmoil, might, however, be one factor that can help the UK to some degree as 2025 advances. After three years in which bonds have struggled, above all in 2022 as central bank interest rates suddenly soared after more than a decade of ultra-loose monetary policy, we see the market as being at a turning point.? Notwithstanding the initial turmoil as Trump prepared to take the stage, the prospects for bonds in our view are now good. Inflation should recede and we expect rate cuts from both the U.S. Fed and the European Central Bank. Recent years have put the income back into Fixed Income and both sovereign and corporate bonds might offer attractive returns going forward.? In our research piece on bonds markets, we weigh up the prospects for global bonds and consider the bond durations that are likely to offer the best return to investors in an environment in which central bank interest rates are falling.?
Sources: Bloomberg Finance L.P., DWS Investment as of 1/31/2025. Returns refer to the period of 12/31/24-1/31/25
Any mentions of specific securities are for illustrative purposes only and should not be considered a recommendation.
Past performance is not a guarantee of future results. The opinions and forecasts expressed are those of the authors and may not come to pass. Forecasts are based on assumptions, estimates, views and hypothetical models or analyses, which might prove inaccurate or incorrect.? Forecasts are not a reliable indicator of future returns. All investments involve risks, including potential loss of principal. Index returns do not reflect fees or expenses, and it is not possible to invest directly in an index. Companies involved in artificial intelligence and big data face intense competition, may have limited product lines, markets, financial resources, and personnel. Artificial intelligence and big data companies are also subject to risks of new technologies and are heavily dependent on patents and intellectual property rights and the products of these companies may face obsolescence due to rapid technological developments.
DWS Glossary?
Fiscal policy?describes government spending policies that influence macroeconomic conditions. Through fiscal policy, the government attempts to improve unemployment rates, control inflation, stabilize business cycles and influence interest rates in an effort to control the economy.
Inflation?is the rate at which the general level of prices for goods and services is rising and, subsequently, purchasing power is falling.
Monetary policy?focuses on controlling the supply of money with the ulterior motive of price stability, reducing unemployment, boosting growth, etc. (depending on the central bank's mandate).
as of 1/31/25 102938_6 (02/2025), 102939_6.0 (02/2025)