MARKET UPDATE
In January, markets experienced broad-based gains, with equities and fixed income both delivering positive returns. Within equities, developed international outperformed, while US stocks saw leadership from midcap companies. Emerging markets lagged, reflecting more subdued investor confidence compared to their developed counterparts. Overall, the month highlighted a "risk-on" sentiment, as investors appeared more willing to allocate to growth and cyclical opportunities as well as a higher sensitivity to the value of the dollar.
Fixed income markets also posted solid performance, with high-yield bonds outperforming safer assets like Treasuries, showing the markets continued appetite for credit risk. While the yield curve didn’t move a whole lot from the end of December to the end of January, it masked the story a bit with yields on 10-year government bonds peaking in January, just south of 4.8%. It was nearly 25 basis points higher than when the year started, before reverting to 4.54%, just 3 basis points below where it began this year.
Economic data remains mixed. Fourth quarter GDP grew 2.3%, driven by a 4.2% surge in consumer spending, particularly on durable goods, as households front-loaded purchases ahead of potential tariffs. However, this boost is likely temporary. Investment declined for the first time since 2022, as high interest rates weighed on business spending, though temporary impacts from the Boeing strike played a role. Inventory drawdowns dragged on GDP, while Core PCE inflation rose 2.5% in Q4 but is expected to ease in January. Meanwhile, the latest market sentiment places a rate cut as a relatively low probably in March (less than 20% as of January 31), if labor market conditions soften, it could be on the table.
ADVISORS’ PERSPECTIVE
The financial markets are closely monitoring the evolving trade policies under the Trump administration, particularly focusing on the proposed tariffs that are still in the pipeline but moving forward. As tariffs loom over imports from countries like China, Mexico, and Canada, the ripple effects on global trade and supply chains are creating a wave of uncertainty in the markets. At this stage, the big question remains whether these tariffs will be implemented or if they are simply part of a larger negotiation strategy in ongoing trade discussions.
The potential for this broad trade war was, in part, anticipated. A shift in administration often leads to changes in policy, and Trump’s hardline stance on trade was seen as a likely source of instability in global markets. In fact, during the transition to the new administration, analysts widely expected trade-related disruptions that could cause short-term market turbulence. Investors are still waiting to see if the tariffs are part of a broader effort to extract concessions from other countries or if they signal a deeper, long-term shift in U.S. trade policy.
Despite the uncertainty surrounding tariffs, U.S. economic data has provided some comfort to investors. The latest GDP figures for the fourth quarter of 2024 were better than expected, driven by strong consumer spending and a healthy labor market. This economic growth suggests that the U.S. economy has some resilience to withstand trade disruptions, even if tariffs are implemented. The long-term impact of these policies could be significant, especially if they lead to slower growth or higher prices in key sectors.
Inflation remains a key concern, and tariffs could fuel upward pressure on prices across many industries. The Federal Reserve is keeping a close eye on the evolving situation. If tariffs lead to increased prices across the board, the Fed may need to adjust its monetary policy to keep inflation in check, which could mean higher interest rates that could dampen consumer spending and slow down economic growth. For the Fed, this could present a tricky balancing act between managing inflation and supporting overall economic growth.
As markets continue to digest the potential implications of the proposed tariffs, much will depend on how the situation unfolds in the coming months. If tariffs are imposed across a range of industries, the effects could be far-reaching, with rising costs, disrupted global supply chains, and volatility in the financial markets. However, if these tariffs are part of a broader trade negotiation that leads to new trade agreements or tariff reductions, it could result in market relief. For now, the financial community remains on edge, unsure of how the broader tariff strategy will unfold and what it will ultimately mean for global trade, corporate profits, and inflation. The coming months will be critical in determining whether the volatility from tariff concerns will subside or if it will persist as part of a prolonged trade conflict.
We remain cautiously optimistic and continue to use a quantitative investing approach. In times of uncertainty, it is more important than ever to follow the data and not make decisions based on emotions. Hilltop’s partnership with Helios relies on facts and data that we use during our recalculations on a bi-weekly basis. Our models adjust appropriately to market conditions.
DISCLOSURE
This update is not intended to be relied upon as forecast, research, or investment advice, and is not a recommendation, offer, or solicitation to buy or sell any securities or to adopt any investment opinions expressed are as of the date noted and may change as subsequent conditions vary. The information and opinions contained in this letter are derived from proprietary and nonproprietary sources deemed by Hilltop Wealth Solutions to be reliable. The letter may contain “forward-looking” information that is not purely historical in nature. Such information may include, among other things, projections and forecasts. There is no guarantee that any forecast made will materialize. Additional information about Hilltop Wealth Solutions is available in its current disclosure documents, Form ADV, Form ADV Part 2A Brochure, and Client Relationship Summary Report which are accessible online via the SEC’s Investment Adviser Public Disclosure (IAPD) database at www.adviserinfo.sec.gov, using SEC # 801-115255. Hilltop Wealth Solutions is neither an attorney nor an accountant, and no portion of this content should be interpreted as legal, accounting, or tax advice.