January Barometer
Developed by Yale Hirsch in 1972, the January Barometer states that “as the S&P 500 goes in January, so goes the year.” More specifically, since 1950 when the S&P 500 has posted a negative return in January, there is an 83.8% chance that the full year S&P 500 return will be flat to negative. So, with the S&P returning around 2.2% this January, we should assume that the 2025 stock market has an elevated probability to be a positive year. Of course, anything can and will occur.
Historical Cases: Positive January, Negative Year-End for the S&P 500
Since 1950, there have been a few instances where the S&P 500 started the year strong in January but ended the year with negative returns.
Here’s a breakdown:
Key Takeaways for 2025
For 2025 to follow this trend, an unexpected market disruptor would likely need to emerge. Looking at historical patterns, some common themes that triggered past declines include:
• 2nd Year of the Presidential Cycle: Typically one of the weakest years for market
performance. However, 2025 is the first year of the cycle, which historically performs better.
• Aggressive Fed Policy: Unlike past tightening cycles, the Fed is currently expected to ease policy in 2025. However, if inflation resurfaces unexpectedly, a shift in Fed policy could trigger volatility.
• Debt Market Concerns: While bond yields remain elevated, spreads are compressing. Unless credit spreads widen significantly, debt-related risks appear contained for now.
January’s solid performance has relieved some of our concerns going into 2025, however, not enough to recommend an overly bullish investment thesis. For now, we are sticking with our “neutral” call, and we will remain open-minded and nimble to events that become market changers.
Economic Liquidity
As we've emphasized many times, liquidity is the lifeblood of both the financial markets and the broader economy. It enables the continuous flow of credit, supporting business operations and driving economic growth. As we enter 2025, with the Treasury’s Overnight Repo Facility nearly fully drawn down, one of our key questions is: Where will the next source of liquidity come from?
In the short term, the economy may benefit from the U.S. reaching its debt ceiling at the end of last year. This situation allows the Treasury to implement “extraordinary measures” to inject new liquidity into the financial system by tapping into its General Account. Currently holding around $700 billion, the Treasury General Account should provide enough of a cushion to sustain government operations while negotiations for a larger budget deal—including a debt ceiling increase—take place later this year.
Technically, a debt ceiling increase may not be required until the summer. However, from a political standpoint, with a significant number of tax laws set to expire or undergo revisions before the end of 2025, we anticipate that Congress will aim to raise the debt ceiling earlier in the year to clear the way for addressing more pressing legislative priorities.
In addition to the Treasury General Account, there are several other actions the Treasury and Federal Reserve can take to provide liquidity as we move through the year. One notable option is the termination of the Fed’s Quantitative Tightening (QT) program. Since June 2022, the Federal Reserve has allowed at least $50 billion in maturing Treasuries and mortgage-backed securities to roll off its balance sheet each month without reinvestment. We consider this an obvious area
for policy adjustment because allowing such a large volume of bonds to mature without reinvestment effectively acts as an additional form of monetary tightening.
Beyond QT, additional measures that could help support liquidity include:
Shifting from QT to QE: The Fed could pivot by reinvesting the monthly runoff of mortgage-backed securities into Treasuries, effectively transitioning from quantitative tightening to quantitative easing.
Relaxing the Supplementary Leverage Ratio (SLR): Easing SLR requirements would allow banks to hold more Treasury securities, increasing demand and enhancing liquidity in the bond market.
Attracting Foreign Buyers: The percentage of U.S. Treasuries held by foreign investors has declined by roughly 50% over the past 15 years. Raising the debt ceiling could steepen the yield curve, creating more attractive conditions for foreign buyers to return to U.S. debt markets.
Liquidity is a necessity in allowing our economy to run smoothly, which in turn supports a healthy stock market. This year we are facing numerous issues that could upset the flow of liquidity, but thankfully there are several options at the disposal of the Treasury and Fed that can be used in times of need. We will update our liquidity viewpoints each month through our Money Flow data.
February Market Outlook
February tends to be the weak link in the best six-month market period (before “Sell in May” kicks in) and even more so in post-election years. As the post-election seasonal chart from the Stock Almanac shows above, there is notable weakness in the S&P during the month of February. This weakness is amplified as well when it’s a post-election year, which 2025 is, where the incumbent party loses. In these cases, the month of February produces roughly a -3.00% return for the month of February before reverse course in early March.
The annual post-election year weakness in February also matches up rather well with the 30-Day Fed Futures Commitment of Traders (COT Data Offset, which was developed by Tom McClellan. This indicator is calling for some form of liquidity issue during the second half of the month and the first part of March, which will cause some market volatility. This indicator only provides estimated periods of potential volatility, it does not provide the potential magnitude of any weakness. It should be noted that this indicator is showing a strong reversal in March, which should continue over the following months.
The biggest wildcard in the market right now—and likely moving forward—is the actions of President Trump. His administration has moved swiftly in its first three weeks, aggressively addressing campaign promises while uncovering new issues that demand attention. Threats of tariffs will likely remain elevated throughout Trump’s first year in office, but we view these primarily as negotiating tactics. Any market dislocations triggered by tariff threats could present attractive opportunities to increase exposure.
One significant positive from the administration, which went largely unnoticed last week, is the Treasury’s announcement that it does not expect to increase debt issuance during the first half of the year. This is a substantial boost for overall market liquidity, as limiting debt issuance helps maintain favorable financial conditions.
Looking ahead to February, we’re not expecting much excitement in the markets. We anticipate the month will be divided into two distinct phases: the first half likely delivering positive returns, followed by relative weakness in the second half, ultimately resulting in a flat month. We’ve been impressed with the market’s resilience over the past few weeks, especially in the aftermath of the DeepSeek news and the post-earnings pullback in the Mag 7 names.
A broader market rally is always a welcome development, and with other sectors shouldering more of the load recently, we believe this diversification will help limit downside risks throughout the month.
Brad Tremitiere
Chief Investment Officer
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