The new year is off to a volatile start. It’s not exactly bad, but it’s not that great either. If you look at January by itself, the market looks strong. But if you look at it next to December or even back to November, the S&P 500 hasn’t made much progress recently.
This past week, DeepSeek, a Chinese AI company, suggested it could develop artificial intelligence faster and more cost-effectively than US companies can. That was enough to scare the Technology sector into a steep sell-off. However, it was short-lived as the sector rebounded in the days following. And at this point, there isn’t enough information to determine if these claims are true or just a fabrication. Only time will tell.
Will eventual government job cuts affect the unemployment rate? Quite possibly. Will we see a recession sooner than I suggested in last month’s video (Bull Market Buzzkill)? I think the timeline still stands. Could it be earlier? Sure. But the economy doesn’t tend to make fast moves like that for longer-term cycles. And recessionary periods tend to start slow and accelerate from there. So there will be signs – many I’ve outlined over the past year.
The Federal Reserve kept interest rates as-is this week – citing optimism in the labor market (unemployment) as well as their inflation goals. As I’ve referenced many times, the 2-year Treasury Note Yield is now above the Fed Funds rate. The “Yield” would suggest that (or maybe agree that) the Federal Reserve should stop cutting rates for now. This is certainly an interesting development to keep a close watch on.
This month’s chart shows the average first-year term of the last seven presidential election cycles. While the overall trend of the year does tend to be positive, there can be a few bumps along the way. This chart shows where they often occur historically in the first year after a US election. However, the market could decide to do something completely different this year. But, as always, I find this a good roadmap to plan out when to look for agreement with this data and trend data. If, for example, the stock market looks to be bottoming in March, then we’ll have an idea of how far and long the following run-up could possibly go.
Seasonality chart of the average S&P 500 movement over the first term of the past seven US elections (Source: Seasonax)
Our Shadowridge Long-Term Trend indicator has been positive since January 17th after a fairly steep sell-off starting in early December. And while it has regained a positive trend reading, it isn’t looking as strong as I would hope if we are to see a continued rally through the first quarter. Looking at the Seasonality chart above, if our Long-Term Trend data agrees with the early February weakness, we would be quick to be defensive in our stock market exposure.
Our Mid-Term Cycle indicator similarly went positive on January 14th and had an impressive spike in positive money flow. However, it is now slowing down almost as quickly as it rose earlier in the month. If it can’t stabilize itself, then that is another factor to consider a defensive market posture.
As of Wednesday night (January 29th, 2025), our Shadowridge Dashboard showed Positive to Negative market sectors as 7 to 4. Only a few days ago, all sectors were on the positive side of our dashboard. But this week the sentiment has been shifting into a more negative position.
Eight RGB Bond Indexes are currently trending positive, above their 50-day Moving Average. The US Treasury Index (RGB01) and the Muni Bond Index (RGB05) are the two weakest bond sectors. Interestingly, the High Yield Muni sector (RGB06) has turned positive. And many of the Economic-influenced sectors have remained positive while the Interest Rate influenced sectors have shown more weakness ongoing.
RGB Economic and Interest Rate Sensitive Bond sectors (Source: ShadowridgeData.com)
The Bond market has remained volatile so far this year and is, at the moment, showing a positive return on the Aggregate Bond Index. But that’s not without up (and down) movements over 1.5% this month. Not what I’d think of as a risk mitigation asset class as it has been in the past. However, there is still room for Interest Rate sensitive bonds to do well in a more recessionary environment. But that is a story for another day.
Bottom Line: We didn’t change much from an allocation standpoint in January as we had already done our defensive work in December. We took advantage of the January dip to top off or add to our longer-term holdings. We’ll ride that while the trend is positive, but Seasonality has us ready to defend should the occasion arise.
Stay safe out there!
1 The Standard and Poor’s 500 is an unmanaged, capitalization-weighted benchmark that tracks broad-based changes in the U.S. stock market. This index of 500 common stocks is comprised of 400 industrial, 20 transportation, 40 utility, and 40 financial companies representing major U.S. industry sectors. The index is calculated on a total return basis with dividends reinvested and is not available for direct investment.
2 Charts are for informational purposes only and are not intended to be a projection or prediction of current or future performance of any specific product. All financial products have an element of risk and may experience loss. Past performance is not indicative of future results.