January Market Recap

Top Global News Events

1. Venezuela and Greenland threats hurt US global credibility

On January 3, the US forces struck Caracas and arrested the President of Venezuela Nicolas Maduro. The administration justified the attack as an arrest and plans to oversee Venezuelan governance during the transition period. In response to the attack, only a few countries supported the decision including Israel, while most western liberal democracies like Canada and the UK released neutral statements, and traditional socialist allies like China and Iran condemned the attack.

Initially, reaction inside the US was mixed and largely based on party lines. Opposition figures accused the administration of carrying out the attack to cater to the interests of American oil companies rather than for democratic regime change. These claims were partially reinforced when President Donald Trump came out and called Venezuela out for “stealing American oil” before stating that now American companies have direct control over Venezuelan oil fields. Commodity markets rallied as oil companies immediately saw valuation increases. However, the event signals potential volatility to the broader market as it shows that Trump is unafraid to carry out attacks without prior warning that could jeopardize global relations and trade.

Throughout the month, Trump further brought back discussions on the potential annexation of Greenland, which was first brought up at the onset of the administration last year. Such rhetoric caused European NATO allies to send limited numbers of troops as a symbolic gesture to show support for Greenland. At the World Economic Forum in DAVOS, Trump retracted some of his direct threats by reassuring the world that no military action would be taken. Such wishy-washy rhetoric, while normal for a President known for strong use of US soft power and gesturing, can continue to cause market volatility.

These forms of rhetoric can lead to a loss of US global credibility, although short term retractions can be reassuring for traders and not lead to immediate crashes. By now, the market understands the nature of Trump's statements in office, and will not crash short-term due to claims knowing the likelihood of action following through is low. However, long term credibility could be damaged, straining relations with key global allies, leading to trade uncertainty and potential market downturns like the independence day tariff downturns seen last year.

2. Canadian Trade Deals with China and Qatar decrease US global dependency

3. Iranian protests cause unrest in the administration

FOMC

The FOMC board voted in a 10-2 decision to maintain interest rates at 3.50%–3.75% range, while the 2 dissenting votes advocated for a cut of 25 basis points. Rates have been cut 3 times in the past year, following increases post-COVID cuts to around 5.25%–5.50% in July 2023, fighting unprecedented inflation. Pauses in rate cuts stabilize the stock market, and show a continuation in the soft-landing strategy. The Fed will likely continue to pursue this strategy of strategic cuts, monitoring inflationary reactions to determine future policy. The current aim is not to overaggressively cut rates, as doing so could risk reupping inflation, wiping away the progress of economic stabilization.

A key note of the Fed is the imminent replacement of long-time fed chair Jerome Powell. Although chances of an early firing have significantly dropped, with prediction markets like Kalshi and Polymarket predicting a less than 10% chance Powell is out before May 14, the end of his current term on May 15. In January, President Trump confirmed that he will appoint Kevin Warsh as Fed chair as replacement of Jerome Powell. While senate confirmation could prove a challenge, Warsh is expected to succeed Powell in the position, with any opposition expected to ease.

A key comparison of Jerome Powell and Kevin Warsh is needed for an understanding of the Fed moving forward. Both Powell and Warsh are lawyers, rather than economists, by trade. Powell is known for his data-driven approach, focusing on the Fed's independence from politics, even under increasing pressure from the white house. He is seen as a moderate that is cautious about significant changes to the Fed rate. He has significant experience as Fed chair, serving in the position since Trump nominated him in 2018 during his first term. On the other hand, Warsh is seen as hawkish when it comes to monetary policy. He calls for lowering interest rates in order to stimulate growth, calling Powell's strategy of a soft landing too slow.

Market Trends

January Barmeter (Moderate Bullish)

The S&P 500 rose 1.4% in January, providing a positive outlook on the year. The “January barometer" theory suggests that a positive January return tends to lead to a positive year. Historically, the average full-year returns following a positive January is 15%, while returns following a negative January sit at just 2.4%.

Midterm Election Year (Moderate Bearish)

Post-depression, the stock market has been historically weak in the second year of a presidency. Studies have shown that political uncertainty, along with the finished implementation of campaign promises, lead to higher volatility and lower returns. Since 1933, the market has had an average return of 4.7% in midterm election years, compared to 9.5% in any other year. Post-election, returns are expected to bounce back strongly according to historical trends.

In a political sense, the second year is often when an administration chooses to implement the dirty work. Strategists advise administrations to implement these policies in the second-year to capture the serial position effect, where memory will favor the beginning and ending. Presidents often implement significant promises in the first year to show that they deliver on promises, while pumping the markets in the third and fourth years as they seek re-election. Political capital declines and the potential to lose congress will further lead administrations to enact radical changes that can cause significant market volatility.