President Trump’s executive orders kept investors on edge, but his position on tariffs provided a tailwind for international markets. A 17% drop in NVIDIA shares, triggered by AI competition from China, highlights the risks of market concentration and stocks priced for perfection, and with solid GDP growth and low unemployment, the Fed left rates unchanged, signaling caution rather than a rush to ease policy.

Fixed income markets had a positive month. U.S. equity markets had a positive return in January and REITs were mostly positive in the month.

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As market concentration has grown, so have the risks associated with it. Large-cap U.S. equities had another banner year as the S&P 500 returned over 25%. Substantial progress has been made on the inflation front, but levels remain stubbornly above the Fed’s 2% target, now sitting at 2.7% and after the Fed’s first rate cut of the year, the 10-year U.S. Treasury yield soared by over 75 basis points—a rare event not seen since 1982.

The Federal Reserve cut its policy rate by another 0.25% in December. Equity markets took a step back in December, and REITs fell in December, negatively impacted by the jump in longer dated interest rates.

A republican victory fueled a rally in the U.S. equity markets in anticipation of pro-business policies such as potential deregulation and tax cuts. The U.S. dollar appreciated, reflecting expectations of inflationary fiscal policies and potential shifts in Federal Reserve actions, and the Federal Reserve and Bank of England cut rates by 25 basis points, citing a need to support economic growth amid moderating inflation.

The Federal Reserve cut its policy rate by another 0.25% in November. U.S. equity markets rallied as investors received some clarity following the presidential election, and REITs ended the month higher, benefiting from the equity market tailwind and a slight decline in interest rates.

Interest rates spiked during the month, a sharp reversal from the third quarter. Equity markets declined across regions, with U.S. large cap outperforming, and a negative month for REITs was primarily driven by the rising interest rate environment, as well as the broader beta to the equity market. 

The Federal Reserve has embarked on the latest cutting cycle, with an initial cut of 50 basis points at its September meeting. Financial markets, on average, have performed well following the onset of an interest rate cutting cycle, and market volatility will likely remain elevated as we head into the presidential election.