Rotation The Has Been Underway. The Case for Thoughtful Diversification Grows Stronger

Market Overview - The S&P 500 reached new all-time highs in January, with the S&P 500 Equal Weight Index outperforming its market cap-weighted counterpart, gaining 3.4% compared to 1.5% [1] - International developed equities led gains at 5.8%, followed by US small-caps at 5.5% and emerging market equities at 5.1% [1] - Bonds performed well, with municipal bonds rising 0.7%, high yield credits gaining 0.6%, and Treasury Inflation Protected Notes increasing 0.5% [1] - Commodities saw strong returns, with silver up 17.1%, crude oil gaining 15.0%, gold rising 12.3%, and broad-based commodities increasing 11.2% [1] Federal Reserve Update - The Federal Reserve held the federal funds rate steady at 3.50—3.75% during the January FOMC meeting, marking the first hold after three consecutive cuts [1] - Economic activity continues to expand, with Q3 GDP growth at 4.4% and a slight decline in the unemployment rate from 4.5% to 4.4% [1] - Consumer confidence fell to 84.5 in January, the lowest since May 2014, indicating growing caution among households [1] Market Sentiment and Asset Performance - The announcement of Kevin Warsh as the new Fed Chair introduced uncertainty, as he is viewed as a hawkish candidate, impacting market expectations [1] - Debasement assets like silver and gold had a strong run but faced pressure following Warsh's nomination, with gold and silver prices dropping approximately 10% and 29% respectively in a single day [1] - Despite short-term consolidation, structural drivers for debasement assets remain, including persistent inflation and fiscal pressures [1] Earnings Growth Outlook - Mid-cap and small-cap stocks are projected to show strong earnings growth, with S&P 400 mid-caps expected to grow EPS by 19% and S&P 600 small-caps by 14% [1] - The contribution of smaller stocks to overall market earnings is expected to rise, indicating opportunities beyond mega-cap names [1] - Equal-weight, sector-neutral strategies targeting the S&P 500 are anticipated to see approximately 13% growth, reinforcing the case for diversification [1] Investment Strategy - The market rotation has been ongoing since April of the previous year, with emerging markets and mid-caps outperforming the S&P 500 [1] - Investors are encouraged to prepare portfolios for a strong US economy, with GDP growth tracking around 5% for Q4 and potential fiscal stimulus from new legislation [2] - The case for thoughtful diversification is emphasized, particularly in light of expected further rate cuts [2]