Channel 11: January 2025 Markets: Leadership Changing?

In his Feb. 6 review of January’s financial markets, DoubleLine Portfolio Manager Ken Shinoda (0:05) asks whether dominant trades of months past and recent years – tech leadership in stocks, market-cap-weighted equity outperformance versus equal weight, and King Dollar – are signaling a regime change. Although a single month is too early to draw conclusions, among other signs, Mr. Shinoda points to two January developments in U.S. stocks: all S&P 500 sectors were positive for the month except information technology, and the market-cap-weighted S&P 500 moved sideways relative to an index that equally weights the same constituent stocks.

Other highlights:

(1:09) The expensive valuation of the S&P 500, which carried a 38x multiple on its cyclically adjusted price-to-earnings (CAPE) ratio.

(2:15) Several “Trump trades,” market moves that came alive around the Nov. 5 election of Donald Trump to a second term as U.S. president, have pulled back or moved sideways, although financial stocks still had momentum through January.

(3:35) A recent ebb in dollar strength: For years, “strong dollar, U.S. exceptionalism,” Mr. Shinoda notes, has been a favored trade. “If that unwinds, that could be very interesting for international equities,” already strong out of the gate in 2025. The FX discussion also touches on the behavior of dollar-euro in the wake of Trump’s election in November 2016 and yen-dollar at historically cheap levels.

(6:19) Commodities might offer a hopeful mix of signals for positive growth but with tame energy pressures on inflation.

(6:46) A review of interest rates across the curve, possible resistance to higher Treasury yields at around 4.70%, tight credit spreads and continuing dis-inversion of the Treasury curve, albeit the latter will likely see little help at the front end until the Federal Reserve sees evidence of a softer labor market and easing inflation.

(9:14) Diminished expectations of cuts to the federal funds target rate – less than two quarter-point cuts priced into the markets for 2025. One contributor: higher break-evens, especially in the two-year Treasury-TIPS comparison, probably reflecting concerns over the prospect of inflationary tariffs.

(10:11) With many fixed-income assets back to their post-crisis tights, Mr. Shinoda finds the most-attractive relative values in Agency residential mortgage-backed securities (RMBS), non-Agency RMBS and commercial mortgage-backed securities.