Animal spirits in January Animal spirits in January http://www.federatedhermes.com/us/static/images/fhi/fed-hermes-logo-amp.png http://www.federatedhermes.com/us/daf\images\insights\article\running-horses-in-water-small.jpg January 24 2025 January 24 2025

Animal spirits in January

The market cheered strong earnings and a new administration.

Published January 24 2025
My Content

Off to Philadelphia this week, rekindling great memories from my college years at U of Penn’s Wharton School—where Trump also attended, and here the comparisons end. Much like my MBA at Pittsburgh’s Carnegie Mellon U, Tepper’s alma mater and again where the comparisons end. The big news in Philly this week has been the Eagles’ attempt to sell the snow that fell during Sunday’s game versus LA last weekend. Shipping it in dry ice, and recommending you freeze it right away, they sold out! I presented my AI Revolution to a large group of advisors at the Loews Hotel, a national historic landmark and home to our country’s first savings bank. After listening to my speech, the tech help told me they discussed what they’d do after AI takes their jobs. (It is a “Can you handle the truth?” type of presentation.) A new week and a new administration, and the S&P is up about 2%, looking like the best start to a new term since Ronald Reagan’s second term in 1985. President Trump’s speech was held in the Capitol due to the bone-chilling temperatures besetting much of the US this week. The small crowd of attendees made the number of tech executives all the more striking. Day 1 of the Trump 2.0 era featured a blizzard of executive orders, as advertised. One item missing from Trump’s orders: tariffs. It was always likely that imposition of tariffs would have to wait—on the assumption that the terms of tariffs are negotiable. He did make motions towards tariffs, though, directing officials to investigate the causes of the trade deficit in goods and to examine whether normal trade status with China should be revoked. But 25% tariffs on Mexico and Canada (?) were threatened for February 1! In Trump’s first term, US stocks fell a combined 5% on days when the US announced tariffs and 7% on days when other countries retaliated.

As January goes, so goes the year, they say. And indeed, since World War II the S&P 500 has risen an average 12.2% in years when January is positive, versus a mere 1.4% when it is not. With the index up roughly 3.5% as of now, so far so good! Meanwhile, investors are struggling to handicap Trump 2.0. Mid-January saw AAII bull/bear sentiment in freefall, plunging to 25.4% bullish on January 15, the lowest since November 2023 and the sort of drop that typically signals capitulation. However, the reading for January 22 rebounded to 43.4%, above the 37.5% long-term average. Both bond pessimism and dollar optimism are at extremes, and the dollar has become highly correlated with US growth stocks. The dollar’s rise since last autumn has been attributed to increases in long-term rates and expectations that a Trump win would slow the Fed’s hand. So far, with much of what Trump has done well-known already, and with tariffs remaining indeterminate, the market has been more interested in earnings and the Fed. The next few months will be important for inflation readings. They could be encouraging, given moderating rents (more below) and potentially favorable y/y comparables. Still, on a non-seasonally adjusted basis, historically a majority of the increase in core CPI takes place in the first quarter. American exceptionalism remains intact, with many major developed and emerging market indices down since Trump won. Anecdotally, the MSCI US index outperformed the MSCI EAFE in each year of Trump’s first term. Breadth remains a concern, unfortunately, with the equal-weighted S&P 500 and the Russell 2000 lagging.

It’s a strong reporting season so far, with earnings likely to rise about 12% y/y factoring in beats, and these solid earnings are being rewarded in share prices. Earnings beats are just a bit above the long-term average of 78%, an impressive sign of strength in the broad market. Both price and earnings momentum strategies are succeeding simultaneously in more sectors than any time since 1977 when data first became available. Banks reported strong earnings, which is noteworthy since they don’t yet reflect benefits from the Trump administration’s deregulatory moves. Soon we’ll turn to the Magnificent Seven. The lion’s share of the economy’s rewards in recent years has gone to the largest companies and the most well-heeled consumers. Now that small business confidence is surging, the “two economies” narrative of recent years may be coming to an end. Smaller caps are seeing increasing analyst estimates and company guidance is looking up. If that continues, breadth should improve. Bullish! Profit growth as measured by the National Income and Product Accounts (NIPA) was up 6% y/y through the third quarter. That metric has always gone negative within a few quarters before a recession begins. No recession on the horizon, thus giving productivity-enhancing investments time to work. And just as animal spirits have arrived on the scene!

Positives

  • Good news on inflation Residential rents are cooling off. CoreLogic’s single-family rent index rose just 1.5%, the lowest in 14 years. Rent prices paid by new tenants fell 2.4% last year. Taking into account both continuing and new tenants, all residential rents rose just 3.2% last quarter, a low for the cycle. The all rents metric leads CPI shelter inflation.
  • America’s exceptional growth The IMF forecasts the global economy growing at a 3.3% rate this year and next, versus a pre-Covid trend of 3.7%. The IMF raised its outlook for US growth and noted that acceleration is more likely than deceleration. For other major economies, however, the growth outlook weakened.
  • Animal spirits in real estate? Existing home sales rose 2.2% m/m in December and 9.3% y/y to an annual rate of 4.24 million, the best since last February. Rates for 30-year mortgages, which had risen to their highest level since the spring, fell nearly 20 basis points this week to a still-high 6.9%. 

Negatives

  • The consumer has a slight cold The University of Michigan’s consumer sentiment index was revised lower for January to 71.1, down from an earlier estimate of 73.2. One-year inflation expectations remained at 3.3%, while five-year expectations dropped from 3.3% to 3.2%. Both figures were up sharply from December expectations. 
  • Mixed signals The S&P Global US services PMI fell to 52.5 versus expectations of 56.5. The manufacturing PMI for its part advanced to 50.1, beating expectations for 49.9. US exports declined, with outbound containers from the Port of Los Angeles off 9.1% y/y.
  • Weak growth across the pond Europe remained mired in sluggish growth, with the German economy now having contracted, albeit modestly, in both 2023 and 2024. Still, there were glimpses of growth, with the Eurozone Composite PMI up 0.6 to 50.2 versus 49.7 expected. Manufacturing remained below the 50 level, indicating further contraction, while services came in at 51.4, showing growth. Consumer confidence in the euro area rose slightly but remained weak at -14.2%, as respondents expressed concern about employment, the economy and financial conditions.

What Else

The Year of the Snake starts January 29 We tend to think January sets the tone for the year. That’s because, for us, the new year starts on January 1. In East Asia, though, it’s the lunar new year that signals a fresh start. That comes in late January or February each year. So, the weak January that Asian markets have suffered may not have the same significance it would here.

Still a huge country China’s population shrank below 1.4 billion in 2024, the third straight year of declines. The UN projects that China’s population will decline by 150 million in 2050. India, where the median age is 28, surpassed China’s population in 2022. The median age in China is now 39; in 1970 it was 18.

The throne room Rumor has it that on January 20, 2017, when Donald Trump arrived in the Oval Office for the first time as president, he had strong views on one aspect of the furnishings. Seeing the washroom, he said, “I hate that décor; change that bathroom” and had it redone as part of a $1.75 million renovation of the White House.

Tags Equity . Markets/Economy .
DISCLOSURES

Views are as of the date above and are subject to change based on market conditions and other factors. These views should not be construed as a recommendation for any specific security or sector.

Issued and approved by Federated Equity Management Company of Pennsylvania

The value of investments and income from them may go down as well as up, and you may not get back the original amount invested. Past performance is not a reliable indicator of future results. 

This is a marketing communication. The views and opinions contained herein are as of the date indicated above, are those of author(s) noted above, and may not necessarily represent views expressed or reflected in other communications, strategies or products. These views are as of the date indicated above and are subject to change based on market conditions and other factors. The information herein is believed to be reliable, but Federated Hermes and its subsidiaries do not warrant its completeness or accuracy. No responsibility can be accepted for errors of fact or opinion. This material is not intended to provide and should not be relied on for accounting, legal or tax advice, or investment recommendations. This document has no regard to the specific investment objectives, financial situation or particular needs of any specific recipient. 

This document is published solely for informational purposes and is not to be construed as a solicitation or an offer to buy or sell any securities, related financial instruments or advisory services. Figures, unless otherwise indicated, are sourced from Federated Hermes. Federated Hermes has attempted to ensure the accuracy of the data it is reporting, however, it makes no representations or warranties, expressed or implied, as to the accuracy or completeness of the information reported. The data contained in this document is for informational purposes only, and should not be relied upon to make investment decisions. 

Federated Hermes shall not be liable for any loss or damage resulting from the use of any information contained on this document. This document is not investment research and is available to any investment firm wishing to receive it. The distribution of the information contained in this document in certain jurisdictions may be restricted and, accordingly, persons into whose possession this document comes are required to make themselves aware of and to observe such restrictions. 

United Kingdom: For Professional investors only. Distributed in the UK by Hermes Investment Management Limited (“HIML”) which is authorised and regulated by the Financial Conduct Authority. Registered address: Sixth Floor, 150 Cheapside, London EC2V 6ET. HIML is also a registered investment adviser with the United States Securities and Exchange Commission (“SEC”).

European Union: For Professional investors only. Distributed in the EU by Hermes Fund Managers Ireland Limited which is authorised and regulated by the Central Bank of Ireland. Registered address: 7/8 Upper Mount Street, Dublin 2, Ireland, DO2 FT59. 

Australia: This document is for Wholesale Investors only. Distributed by Federated Investors Australia Services Ltd. ACN 161 230 637 (FIAS). HIML does not hold an Australian financial services licence (AFS licence) under the Corporations Act 2001 (Cth) ("Corporations Act"). HIML operates under the relevant class order relief from the Australian Securities and Investments Commission (ASIC) while FIAS holds an AFS licence (Licence Number - 433831).

Japan: This document is for Professional Investors only. Distributed in Japan by Federated Hermes Japan Ltd which is registered as a Financial Instruments Business Operator in Japan (Registration Number: Director General of the Kanto Local Finance Bureau (Kinsho) No. 3327), and conducting the Investment Advisory and Agency Business as defined in Article 28 (3) of the Financial Instruments and Exchange Act (“FIEA”). 

Singapore: This document is for Accredited and Institutional Investors only. Distributed in Singapore by Hermes GPE (Singapore) Pte. Ltd (“HGPE Singapore”). HGPE Singapore is regulated by the Monetary Authority of Singapore. 

United States: This information is being provided by Federated Hermes, Inc., Federated Advisory Services Company, Federated Equity Management Company of Pennsylvania, and Federated Investment Management Company, at address 1001 Liberty Avenue, Pittsburgh, PA 15222-3779, Federated Global Investment Management Corp. at address 101 Park Avenue, Suite 4100, New York, New York 10178-0002, and MDT Advisers at address 125 High Street Oliver Street Tower, 21st Floor Boston, Massachusetts 02110.

Stocks are subject to risks and fluctuate in value.

Bond prices are sensitive to changes in interest rates, and a rise in interest rates can cause a decline in their prices.

Small company stocks may be less liquid and subject to greater price volatility than large capitalization stocks.

International investing involves special risks including currency risk, increased volatility, political risks, and differences in auditing and other financial standards. Prices of emerging-market and frontier-market securities can be significantly more volatile than the prices of securities in developed countries, and currency risk and political risks are accentuated in emerging markets.

Gross Domestic Product (GDP) is a broad measure of the economy that measures the retail value of goods and services produced in a country.

Consumer Price Index (CPI): A measure of inflation at the retail level.

S&P 500 Index: An unmanaged capitalization-weighted index of 500 stocks designated to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. Indexes are unmanaged and investments cannot be made in an index.

The American Association of Individual Investors (AAII) Bulls Minus Bears Index is a measure of market sentiment derived from a survey asking individual investors to rank themselves as bullish or bearish.

Russell 2000® Index: Measures the performance of the 2,000 smallest companies in the Russell 3000 Index, which represents approximately 8% of the total market capitalization of the Russell 3000 Index. Investments cannot be made directly in an index.

MSCI Europe, Australasia and Far East Index (EAFE) is a market capitalization-weighted equity index comprising 21 of the 48 countries in the MSCI universe and representing the developed world outside of North America. Each MSCI country index is created separately, then aggregated, without change, into regional MSCI indices. EAFE performance data is calculated in U.S. dollars and in local currency.

MSCI USA Index: Designed to measure the performance of the large and mid-cap segments of the U.S. market. With 627 constituents, the index covers approximately 85% of the free float-adjusted market capitalization in the U.S. Indexes are unmanaged and investments cannot be made in an index. 

The CoreLogic Home Price Index measures year-over-year changes in home prices.

The University of Michigan Consumer Sentiment Index is a measure of consumer confidence based on a monthly telephone survey by the University of Michigan that gathers information on consumer expectations regarding the overall economy.

Formerly known as Markit, the S&P Global Manufacturing Purchasing Managers Index (PMI) is a gauge of manufacturing activity in a country.

Formerly known as Markit, the S&P Global Services Purchasing Managers Index (PMI) is a gauge of services activity in a country.

The Eurozone Composite PMI is a measure of combined manufacturing and services activity in the region.

4062495206