Weekly Newsletter January 27th to January 31st

‍

RECAPPING LAST WEEK

U.S. equity indices wobbled as investors weighed concerns about artificial intelligence spending, tariffs, Federal Reserve policy, and the latest inflation figures. The S&P500 and Russell 2000 indices ended the week down 1%, while the Nasdaq Composite recovered from a sharp selloff to finish lower by 1.6%. Value stocks outperformed growth as rotation was evident. The technology sector plunged more than 5% on Monday, before clawing back some of the losses, after the release of a new cost-efficient AI model from China initiated a hotly contested debate about chip and energy demand. Mixed earnings results from technology mega-caps fueled additional volatility. Gold futures jumped 2% to a new weekly closing high, while crude oil slumped 1.5% after news that the White House was expected to announce 25% tariffs on Canadian and Mexican goods beginning March 1. Oil is the top U.S. import from Canada and a top five import from Mexico. U.S. Treasury yields fell modestly across the curve despite a FOMC statement that could be interpreted as mildly hawkish. The Fed left interest rates unchanged, portraying the labor market as “solid” but describing inflation as “somewhat elevated”, a change from the prior statement that suggested ongoing progress towards the committee’s 2% goal. The final PCE index reading from 2024 revealed a 2.6% increase YOY—slightly higher than the November figure—while the core reading came in at 2.8% YoY. Fed Chair Powell expressed optimism for progress on lowering inflation but said that being set up for it is one thing, while having it is another. U.S. economic growth slowed more than expected in Q4, while consumer spending remained robust. GDP increased 2.3% versus forecasts of 2.5%, as compared with growth of 3.1% in Q3. Trade was a drag on performance, as businesses likely front-loaded imports ahead of potential tariffs. However, consumer spending—which accounts for two-thirds of economic activity—rose 4.2% in the quarter. Consumer confidence fell to a four-month low in January, as Americans expressed higher inflation expectations and less optimism on jobs. New homes sales continued to rise in December, but pending sales—the strongest indicator of current activity—were hampered by mortgage rates moving above 7% once again. Overseas, the European Central Bank lowered interest rates by a quarter-point to 2.75% and kept the door open for further easing. Europe’s economy saw no growth in Q4 2024, while Germany and France—the region’s two largest economies—contracted slightly over the same period. Additionally, Germany’s preliminary flash CPI estimate for January slipped to 2.3% YoY from 2.6% the prior month, although services inflation remained elevated. The Bank of Canada reduced its benchmark rate by 25 basis points to 3%, citing U.S. trade policy as a major source of uncertainty. Australia’s consumer inflation slowed in Q4, raising expectations for a rate cut next month. Meanwhile, Japan’s inflation accelerated, keeping hopes alive that more rate hikes are forthcoming. Finally, China’s factory activity unexpectedly shrank in January, with manufacturing PMI slipping to 49.1. Deflation pressures persisted, highlighting needs for more government stimulus.

‍

THE WEEK AHEAD

As the calendar flips to a new month, investors’ attention will turn to jobs data in the U.S., while the Bank of England gets the central bank spotlight. U.S. non-farm payroll growth is expected to be around 150k, while average hourly earnings are forecasted to ease slightly. Given the Fed’s comments last week, an in-line or stronger report is likely to reinforce keeping interest rates on hold. ISM manufacturing and services PMIs will be released today and Wednesday. Factory orders, preliminary Q4 productivity numbers, and consumer sentiment round out the domestic economic calendar. For the final major week of earnings season, company reports to watch include Palantir, Advanced Micro Devices, Amazon, Qualcomm, MicroStrategy, and more. Overseas, the Bank of England is likely to cut interest rates by a quarter-point on Thursday. It may also signal more future reductions than previously thought, due to the UK economy stalling and inflation unexpectedly easing last month. Ahead of the meeting, the BOE launched a new financial stability tool to help ease bond market volatility during times of stress. In Europe, flash CPI readings were released today, with German factory orders and industrial production figures due later in the week. The OPEC+ alliance of major oil producers is scheduled to meet today, where President Trump’s recent proposal to expand U.S. output is likely to be a topic of discussion. Last of all, China’s Caixin PMI data is expected to confirm weakness from the official government numbers from last week, and inflation data will be released over the weekend.

‍

CHART OF THE WEEK

Is the rally broadening?

Last week we discussed large-cap equities and their continuous progress into uncharted territory. This week, let’s look at the recent performance of smaller capitalization stocks, represented by the Russell 2000 index (RUT). Although RUT has underperformed the S&P500 (SPX, purple line) for the past 18 months, it has consistently marked higher highs and higher lows since the October 2023 bottom, matching its 2021 all-time high just two months ago. This completed a rounding bottom pattern in the shaded area that would be confirmed with a weekly close above the 2021 high near $2,460. Further technical signs have emerged that the tide may be turning for small-cap performance. The relative strength indicator for RUT versus SPX has been down-sloping for years but recently broke above resistance and made a higher low. The MACD for RUT is still showing positive momentum, while SPX flashed a bearish divergence last week. Additionally, the role of the U.S. dollar index ($DXY) cannot be overlooked. There have been two notable declines in $DXY over the last six months—one in November, and another just a few week sago. During both periods, RUT significantly outperformed SPX. If the dollar continues to trend lower, it may be a tailwind for all equities, but it may provide an even bigger boost for small caps.

‍

‍

Source: Charles Schwab Corporation

‍

_{IMPORTANT LEGAL NOTICE AND DISCLOSURE INFORMATION}

_{Investment advisory service is provided by SVL Holding Corporation dba SVL Investments Management (“SVL”), a California registered investment advisor. Advisory services are subject to advisory fees as disclosed on Form ADV.}

_{Investing involves risks, and investment decisions should be based on your own goals, time horizon, and tolerance for risk. The forecasts or forward-looking statements are based on assumptions, may not materialize, and are subject to revision without notice. International investments carry additional risks, which include differences in financial reporting standards, currency exchange rates, political risks unique to a specific country, foreign taxes and regulations, and the potential for illiquid markets.}

_{Past performance may not be indicative of future results. Therefore, no current or prospective client should assume that future performance of any specific investment, investment strategy (including the investments and/or investment strategies recommended or undertaken by SVL) or product made reference to directly or indirectly by SVL in its web site, or indirectly via a link to an unaffiliated third party web site, will be profitable or equal the corresponding indicated performance level(s). Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by SVL), or any non-investment related content, made reference to directly or indirectly on this site will either be suitable or profitable for a client or prospective client’s investment portfolio. Historical performance results for investment indices and/or categories generally do not reflect the deduction of transaction and/or custodial charges, the deduction of an investment management fee, or the impact of taxes, the incurrence of which would have the effect of decreasing historical performance results for investment indices.}

_{Certain portions of SVL‘s web site (i.e. blog, Insights, newsletters, articles, commentaries, etc.) may contain a discussion of, and/or provide access to, SVL‘s (and those of other investment and non-investment professionals) positions and/or recommendations as of a specific prior date. Due to various factors, including changing market conditions, such discussion may no longer be reflective of current position(s) and/or recommendation(s). Moreover, no client or prospective client should assume that any such discussion serves as the receipt of, or a substitute for, personalized advice from SVL or from any other investment professional. SVL is neither an attorney nor accountant, and no portion of the web site content should be interpreted as legal, accounting or tax advice.}

_{Rankings and/or recognition by unaffiliated rating services and/or publications should not be construed by a client or prospective client as a guarantee that he/she will experience a certain level of results if SVL is engaged, or continues to be engaged, to provide investment advisory services, nor should it be construed as a current or past endorsement of SVL by any of its clients. Rankings published by magazines, and others, generally base their selections exclusively on information prepared and/or submitted by the recognized adviser.}

_{To the extent that any client or prospective client utilizes any economic calculator or similar device contained within or linked to SVL‘s web site, the client and/or prospective client acknowledges and understands that the information resulting from the use of any such calculator/device, is not, and should not be construed, in any manner whatsoever, as the receipt of, or a substitute for, personalized individual advice from SVL, or from any other investment professional.}

_{Each client and prospective client agrees, as a condition precedent to his/her/its access to SVL‘s web site, to release and hold harmless SVL, its officers, directors, owners, employees and agents from any and all adverse consequences resulting from any of his/her/its actions and/or omissions which are independent of his/her/its receipt of personalized individual advice from SVL.}