“If everyone is thinking alike, then somebody isn’t thinking.” -General Patton
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 (Job growth skyrocketed boosting one of the strongest labor markets in US history) highlights the resilience of the economy and consumer, suggesting it may need less intervention from the Federal Reserve in the form of lower interest rates. 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.
Interestingly, Trump’s economic approach shares similarities with Reagan’s supply-side principles, emphasizing low taxes and deregulation as catalysts for growth. Trump’s administration frequently championed the idea that these measures would spur GDP growth and job creation. However, his trade policies—marked by tariffs and a more protectionist stance—departed from the free-market philosophy typically associated with Reaganomics.
To put this moment in perspective, here are three key points to consider:
Market Volatility is Normal
Stocks take the escalator up, but the elevator down
Setting the right expectations is key during periods of market turbulence. While early-year declines can rattle nerves, it’s worth remembering that we’re only a few weeks into the year, leaving ample room for the market to find its footing. Last year, for instance, began with a brief pullback but ultimately gave way to a robust rally. Though history never guarantees future performance, long-term investors are better served by staying the course rather than reacting impulsively to short-term noise.
The accompanying chart (below)underscores just how calm markets have been recently. The largest decline for the S&P 500 last year was a mere 8%—well below the historical average annual pullback of nearly 14%, observed across both bull and bear markets. Market pullbacks of this magnitude, while unsettling in the moment, are a normal part of investing.
Time and again, history has shown that markets tend to recover from these short-term dips. Attempting to time them not only adds unnecessary stress but often results in missed opportunities. Investors who weathered recent years—navigating a global pandemic, inflation surges, aggressive Fed rate hikes, and geopolitical turmoil—have come out ahead. This highlights the importance of focusing on long-term goals and using periods of volatility as opportunities to review and rebalance portfolios strategically.
The Magnificent 7 Leading the Way
“We always overestimate the change that will occur in the next two years and underestimate the change that will occur in the next ten. Don’t let yourself be lulled into inaction.” –– Bill Gates
Another point of concern for investors is the sustainability of the rally in technology and artificial intelligence (AI) stocks. Much of the market’s strong performance has been driven by the so-called “Magnificent 7”—seven heavyweight tech stocks that have capitalized on the AI boom. Since the start of 2023, this elite group has soared an astounding 250%, with gains nearing 500% since 2020. Their influence on the broader market has been profound.
However, as remarkable as these returns are, it’s important to maintain a balanced perspective. During 2022, when rising interest rates and economic uncertainty loomed large, growth-oriented sectors like tech were among the hardest hit, with many major tech stocks down nearly 50%. This vulnerability stems from how these companies derive their value—largely from anticipated future earnings and cash flows. Higher interest rates can sharply reduce the present value of those future earnings, exposing tech stocks to greater downside risk.
In fact, nearly 35% of the S&P 500’s market capitalization is now weighted in technology, and this sector contributes to nearly 50% of the index’s overall volatility. This concentration creates additional risks. As stocks like Nvidia and others in the Magnificent 7 continue to outperform, they can become disproportionately large components of both indices and individual portfolios. This over-concentration can inadvertently skew diversification, leaving portfolios more vulnerable to swings in just a few stocks.
This isn’t a prediction on whether the Magnificent 7 will continue their meteoric rise. Rather, it’s a reminder that successful investing is not about chasing a handful of winners. Instead, it’s about crafting a diversified portfolio aligned with long-term goals. This is where the guidance of a trusted advisor can be invaluable, helping investors navigate both opportunities and risks in evolving market landscapes.
Valuations are Historically High
“The higher we soar, the smaller we appear to those who cannot fly.”- – Albert Einstein
One of the most striking challenges for investors this year is the elevated level of stock market valuations. As the accompanying chart highlights, the price-to-earnings (P/E) ratio for the S&P 500 sits at 21.5x—well above its historical average of 15.8 and inching closer to the dot-com bubble’s all-time peak of 24.5x. This has sparked debates about whether the market, or at least AI-related stocks, is entering bubble territory.
A high P/E ratio signals that investors are paying a premium for every dollar of earnings, which often translates to lower future returns. In other words, markets may be borrowing from tomorrow’s gains. The critical question is whether this rally is grounded in solid fundamentals or inflated by exuberance, as it was in 2000 or 2008. For now, the economic backdrop offers reasons for optimism: steady growth, a resilient labor market, and strong earnings among the companies driving the most enthusiasm.
Elevated valuations don’t necessarily mean it’s time to avoid stocks altogether. Instead, they call for balance. Diversifying across sectors beyond the tech-heavy Information Technology and Communication Services groups can help smooth returns. Incorporating value stocks, small caps, or other uncorrelated assets into portfolios provides further protection against concentrated risks. The key is building a portfolio that’s aligned with your specific goals and risk tolerance.
The Bottom Line: Recent market turbulence, coupled with experts questioning the reliability of the Santa Claus rally and January Barometer, serves as a powerful reminder of the importance of discipline. Instead of reacting impulsively to short-term volatility, chasing lofty valuations or investing based on market maxims, focus on maintaining a well-diversified portfolio. A strategy grounded in fundamentals and aligned with your long-term financial goals is the best way to navigate uncertainty and stay on track for lasting success.
For more information on our firm or to request a complementary investment and retirement check-up with Jon W. Ulin, CFP®, please call us at (561) 210-7887 or email jon.ulin@ulinwealth.com.
Diversification does not ensure a profit or guarantee against loss. You cannot invest directly in an index.
Note: This content is for informational purposes only and should not be construed as financial, legal, or tax advice. Please consult your financial advisor, attorney, or tax professional regarding your specific situation.
You cannot invest directly in an index. Past performance is no guarantee of future returns. Diversification does not ensure a profit or guarantee against loss. All examples and charts shown are hypothetical used for illustrative purposes only and do not represent any actual investment. The information given herein is taken from sources that are believed to be reliable, but it is not guaranteed by us as to accuracy or completeness. This is for informational purposes only and in no event should be construed as an offer to sell or solicitation of an offer to buy any securities or products. Please consult your tax and/or legal advisor before implementing any tax and/or legal related strategies mentioned in this publication as NewEdge Advisors, LLC does not provide tax and/or legal advice. Opinions expressed are subject to change without notice and do not take into account the particular investment objectives, financial situation, or needs of individual investors.