Liz Looks at: Beginning of Year Markets

Off to the Races

Only eight days into the new year and things have already been exciting in markets… depending on your definition of exciting. The moves really began at the end of 2024 and have persisted since.

Let’s start with Treasury yields. As of Wednesday, January 8, the 10-year Treasury yield is at 4.70%, up 55 basis points since early December. The rise can be attributed to some strong economic and inflation data and commentary from the incoming administration on possible tariff policies. A move this large is notable, and something we’ve become used to during this business cycle.

Perhaps the more important effect it has had is on the 2-year/10-year yield curve spread, which has steepened steadily for the last six weeks.

Regardless of whether these have been bull steepeners or bear steepeners (with the terms bull & bear referring to the bond market, not the equity market), the rise in 10-year yields has put some stress on equity markets. Over that same six week period, the S&P 500 is down roughly 2%.

It isn’t all bad news though. The 10-year rising due to stronger economic data can be a good sign, it’s just that the absolute level of yields right now is causing stocks to pause and reflect. Despite the broad market being down over that period, cyclical stocks have outperformed defensive stocks, which sends the message that markets are not in fear mode at this point.

Not to mention, market action has been bumpy with some very strong days interspersed; investors are in a waiting game until we have more policy clarity, which leaves markets at the mercy of headlines and data releases.

Who’s to Lead the Pack in 2025?

There have been some major rotations in markets over the past couple months, including between the equal weighted S&P 500 and the market-cap weighted S&P 500, with the latter taking center stage over recent periods.
The equal weighted index, or what’s commonly referred to as the “average stock” had been doing quite well during the broadening out trade, and is still ahead of the market-cap weighted index over six months. However, recent outperformance of megacaps is shifting that trend. And it’s likely no surprise that the stocks leading that pack are the usual suspects in the Magnificent Seven stocks.

Concentration in markets is back again, and although a force we’re accustomed to, it does pose risks to sentiment and market direction. An overreliance on just a handful of names presents the opportunity for markets to be at the mercy of those companies’ results, and reduces the number of stocks that are able to pick up the slack in the event of a pullback.

For this reason, although I do believe the megacaps are generally good companies with bright futures, it is important to see some renewed strength from other parts of the index – namely, cyclical sectors such as Industrials, Financials, and Energy.

Dollar Bills

The last piece of this market puzzle that has been rather eye-popping is the recent strength in the U.S. dollar. It currently sits at its highest level since 2022 when the Fed began hiking rates and inflation hit a peak of 9.1%.

This has increased currency volatility around the globe with most major currencies weakening against the dollar, and causing investors to wonder if there is a top in sight. No doubt, the dollar strength has happened in tandem with rising 10-year yields, and again much of the move has been driven by stronger economic and inflation data – especially in comparison to weaker data abroad – and commentary around tariff increases that may be coming.

Since this recent strength has not been coupled with fear in markets, it’s not necessarily something to be fearful of and it’s important to note that we are still below the peak of 2022. Moreover, a possible upcoming boost to market liquidity from the Treasury General Account or a debt ceiling resolution could push the dollar back down a bit.

Often, the reasons for dollar strength are more important than the level itself. As of now, the reasons are understandable and not riddled with defensive posturing, but this is certainly something to keep an eye on for the first quarter.

Another year, another January that’s off to an interesting start. I always feel excited at the beginning of the year for all of the surprises that could be in store, and all of the things we’ll learn this year as investors. Happy trading to all.

Want more insights from Liz? The Important Part: Investing With Liz Thomas, a podcast from SoFi, takes listeners through today’s top-of-mind themes in investing and breaks them down into digestible and actionable pieces.

Photo Credit: iStock/Nikada

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