Monthly economic and market review: January 2025

“As goes January, so goes the year” is an old market adage sometimes referred to as the “January Barometer”. The expression doesn’t carry the same level of certainty as death and taxes but it is a nice one to believe in when the markets close out the first month of the year on a positive note. The first days of 2025 began with a little of the end-December shakiness but the markets found their footing amidst all of the Trump-induced market volatility and closed higher for the month. Trump’s campaign promises of lower taxes and deregulation have generally buoyed the markets but the third promise/threat of tariffs on imported goods from China, Canada, Mexico and other trading partners has hogged the headlines and escalated market uncertainty. The wave of executive orders along with many quick retractions further confused investors.

The markets also received a jolt during the month from news out of China that a new low-cost and open source artificial intelligence (“AI”) model, DeepSeek, had been developed that could rival the very best (and costliest) that the US had to offer. This revelation came hot on the heels of the announcement of “Stargate”, a new company with a $500bn four-year budget to build new AI infrastructure for OpenAI through the collaboration of industry giants Oracle, ARM, Microsoft, Nvidia and OpenAI along with Abu Dhabi’s MGX Fund Management and Japan’s Softbank. The revelation of DeepSeek had investors questioning whether such huge capital expenditure on semiconductor chips would be necessary in the future and what that might mean for chip-makers and other more expensive AI models. The technology sector’s response was swift and harsh and market darling Nvidia, that had notched up a lifetime high of $149.43 earlier in the month, found itself sharply lower at $120.07 per share at month-end. Technology was the worst performing S&P 500 market sector in the month and the only sector that turned in a negative result in January.

The benchmark S&P 500 index notched up a new record high at 6,118 points on the 23^rd, after recording 57 all-time highs last year, and closed 2.7% higher in the first month of the year (the green line in the chart below). Sectors that outperformed the S&P 500 index’s positive 2.70% return in January included Communication Services (+8.9%), Healthcare (+6.6%), Financials (+6.4%), Materials (+5.5%), Industrials (+4.9%), Consumer Discretionary (+4.3%) and Utilities (+2.8%). The underperforming sectors included Information Technology (-2.9%), Real Estate (+1.7%), Consumer Staples (+1.8%) and Energy (+2.0%). Amongst other US indices, the NASDAQ Composite index closed 1.64% higher, the Dow rose 4,70% and the Russell 2000 closed up 2.58%.

FTSE/JSE All Share index (blue, RHS) and S&P 500 index (green, LHS): 12 months to 31 Jan 2025

Source: Factset

The FTSE/JSE All-Share index rose 2.21% in the month (see the blue line in the chart above) as the rand showed some modest strength against the crosses and as precious metals prices jumped higher. The gold price topped $2,800/oz to record yet another lifetime high while platinum rose 15% in the month to trade back above $1,000/oz. The positive return on the local market in January could almost exclusively be ascribed to the returns from the commodities stocks (see table below). Harmony (+42%), AngloGold Ashanti (+34%), Gold Fields (+30%), Northam (+30%) and Sibanye (+20%) led the charge with strong support from Kumba Iron Ore, Implats, Angloplat and Exxaro which all rose between 10% and 20%. All of that positivity lifted the FTSE/JSE Resources index by 16.1% in January against the 2.8% decline in Industrials and the 6.0% decline in Financials. The one non-resources company that shot the lights out in January was Richemont. A cracker third quarter sales update released mid-month sent the shares to all-time highs on both the local and Swiss Exchanges. Luxury goods stocks had been under pressure for some time as Chinese demand waned but the Richemont update helped the share to a 30% gain in January and gave luxury goods peers a bit of a boost.

US fourth quarter earnings reporting season got underway mid-January and was in full swing by month-end. The vast majority of companies that reported published better-than-expected earnings, with many of the beleagured (and defensive) healthcare stocks outperforming as technology stocks lagged. Meta (+17%) was a noticebale exception, as strong results and positive guidance boosted the counter to an all-time high of $689 per share by month-end (from $215 per share five years ago and $75 per share a decade ago). Banking and financials stocks had been on the up and up after campaign promises of financial deregulation by President Trump but they got an added kicker from publishing earnings that generally beat consensus expectations by between 10% and 20%. Citigroup (+15%) was a notable gainer, reaching an all-time high of $81.98 that just pipped the previous pre-pandemic peak of $81.91 of January 2020 (and coming from $38.24 in October 2023).

Inflation and interest rates have been all that the market could think about in recent years but US political developments, earnings reports and the DeepSeek news stole all of the market attention in January. That’s not to say that interest rates had suddenly become less important, it was just that the pause in the interest rate cutting cycle by the Federal Reserve in January had been very well telegraphed. The market had already reacted in December when the Federal Reserve published its Summary of Economic Projections (or “dot plot”) showing that only two rate cuts were expected in 2025 and that made the January meeting of the Federal Reserve’s Open Market Committee something of a non-event. US Treasury yields were little changed in the month (see table below) with consumer price inflation printing at 2.9% y/y. Inflation and the prospect of central bank policy changes will still be closely considered by the market, particularly when tariffs do finally see the light of day. Strictly speaking, a tariff hike, much like a VAT rate hike, does push up prices and inflation numbers in the short-term but it is not a sustained increase in prices (i.e. inflation) and the impact should fall out of the reckoning after a year.

The Monetary Policy Committee of the South African Reserve Bank did ease policy in January with a 25 basis point cut in the repo rate. The decision was reached after a 4-2 split of the votes with the two dissenting voices calling for an unchanged repo rate. In his announcement of the policy decision, the governor pointed to the upside risks to their inflation forecast and also to the many uncertainties on the global front. He viewed the new policy stance to be “somewhat neutral” as opposed to still being restrictive. The committee analysed the potential impact of US tariffs and a global trade war on the local economy and saw the possibility of a rand at R21/$ and a repo rate 50 basis points higher. While this may not be the base case forecast, the governor reinforced the committee’s penchant to err on the side of caution. That could mean anything from a final rate cut to no further rate cuts in this policy easing cycle. The inflation target range of 3-6% is also under review and the governor is engaging with the Minister of Finance on what the future benchmark should be. The governor has always focussed on the 4.5% midpoint of the range and so a point target seems more likely than a change to the range. That point is also likely to be lower than 4.5% when the parties have concluded their deliberations (any odds on a 3% point target?).

The markets still have much to digest and there are lots of unknown unknowns. Trump barks an order one day and rescinds it the next day. Geopolitical tensions continue to run high and trade tariffs only rattle nerves further. The Middle East truce remains fragile and the Ukraine-Russia conflict continues. It’s even getting a little blurry about who is on whose side. Investing in such a cloudy or noisy environment seems difficult. At the end of the day though, investing is a long-term activity that exceeds a presidential term, a single interest rate cycle, a global financial crisis or even a one in a hundred year pandemic. It’s all about earnings – that’s what we’re investing in over the longer term. Successful investing is about buying those companies that grow their earnings and cash flows year after year and continue to invest in themselves. That compounding process is what creates wealth for shareholders over the longer term. One shouldn’t invest with blinkers on and ignore the world around us but DeepSeek, disparaging dictator diatribes and disruptive digital developments shouldn’t derail a well-researched and well-constructed long-term investment portfolio.