Market Commentary - February 2025

Despite a bumpy start, as December’s rough end carried over, stocks rallied to post strong gains across the board in January. Led by a 4.7% surge by Dow Jones Industrials, investor risk appetite returned with elevated expectations of deregulation, lower taxes, and higher corporate earnings. A peaceful transfer of power on January 20 to the new Trump Administration calmed markets as well.   

For much of January, the market showed signs of broadening with strong contributions from mid-cap and small-cap stocks. The S&P 400 mid-cap index jumped 3.8%, while the Russell 2000 small-cap benchmark gained 2.6%, with both recovering some of December’s losses.  

In many ways, it was a reversal of 2024’s market performance, with value outperforming growth and international outperforming US, which is encouraging the market’s success is not wholly dependent on the Magnificent Seven. 2024’s leading indexes also posted solid gains to start the year; the benchmark S&P 500 rose 2.7%, while the tech-heavy Nasdaq lagged with a 1.6% gain.  

Overseas, developed market stocks shined in January and another reversal of 2024, with the benchmark MSCI EAFE index gaining 5.2%, as investors took advantage of valuations and a moderating US dollar to start the year. The MSCI EAFE index nearly gave up all its 2024 gains in the 4th quarter as the US dollar surged and a strong start to 2025 is encouraging. The European Central Bank (ECB) cut policy rates 0.25% in January, while the Bank of Japan raised rates by 0.25%. Emerging Markets posted a solid but more modest 1.7% gain.  

Q4 US Gross Domestic Product (GDP) grew at a solid 2.3% annualized pace and the unemployment rate dipped to 4.1% on continued strong job numbers. The economic soft-landing scenario remains firmly in place providing the Fed flexibility and patience in its monetary policy.  

Interest rates were volatile in January, as tariff and immigration uncertainty, along with sticky inflation expectations gripped the bond market, yet the benchmark 10-year Treasury Note yield rallied following a tick down in December Core-CPI to 3.3% to finish flat for the month closing at 4.58%, despite hitting 4.79% mid-month. The Bloomberg Aggregate Bond Index edged higher 0.5% thanks to the late rally. 

As expected, the Fed paused and held policy interest rates steady at its first FOMC meeting of 2025 on January 28-29 following three consecutive rate cuts to end 2024; the Fed signaled it is in no hurry to cut interest rates further despite its December projection of two rate cuts in 2025. Meanwhile, the market pushed out rate cut expectations to the June meeting and is now expecting 1-2 rate cuts. 

February Update:  

Investor optimism remained intact in February, as the market absorbed a hotter-than-expected CPI report for January and strong tariff talk, adding to the January gains.  

The benchmark S&P 500 and tech-heavy Nasdaq outpaced the Dow, small-caps, and mid-caps to begin February, as the latter moderated, and large-cap growth stocks rallied. As of February 14, the Dow Jones Industrials remain the US leader for 2025 with a 4.7% gain; however, the S&P 500 and Nasdaq have closed the gap with YTD gains of 4.0% and 3.7%, respectively.  Foreign markets have continued their strong start, with the benchmark MSCI EAFE index gaining an additional 2.9% in February to extend its leading YTD returns to 8.2%. MSCI Emerging Markets have jumped 2.9% in February, raising their YTD gains to 4.6%. 

Despite the hot January CPI report, bonds have rallied in February bringing the benchmark 10-Year Treasury yield down to 4.47% ending February 14. The benchmark Bloomberg Aggregate Bond index is up 0.6% in February and 1.1% YTD. Fed rate cut expectations have been pushed out to the September FOMC meeting. 

Diversified portfolios remain a key theme for 2025, and our cautiously optimistic outlook for 2025 remains as well. However, given elevated valuations and expectations, we anticipate 2025 will be more volatile than last year, with a wider range of variables, and discipline will be imperative.  

We continue to encourage investors: 

• Remain well-diversified 

• Maintain discipline and patience 

• Focus on the long-term 

• Review your Risk Tolerance 

Call your Nelson Advisor today at 800-345-7593 to discuss any concerns and review your portfolio. 

~Your Nelson Securities Team     

*Past Performance is No Guarantee for Future Results