Market Sentiment Dips as Charles Schwab Trading Activity Index Declines in January

The start of 2025 proved to be a mixed bag for investors as the Charles Schwab Trading Activity Index (STAX) declined to 49.45 in January, down from 51.16 in December.

This shift suggests that retail investors on the Schwab platform took a more cautious approach to the market following a period of volatility and macroeconomic uncertainty. The downturn in trading activity reflected broader concerns over inflation, interest rate policy, and geopolitical risks that weighed on investor sentiment during the month.

Macroeconomic Factors Driving Market Volatility

The S&P 500 stumbled out of the gate in January, initially losing nearly 1 percent as investors grappled with rising bond yields and renewed inflation concerns.

The benchmark 10-year Treasury note yield spiked to a 14-month intraday high of 4.8 percent on January 14, reflecting worries about potential policy shifts under the incoming presidential administration. Proposals surrounding tariffs, immigration policy, and a more aggressive stance from the Federal Reserve contributed to the unease.

However, the tide turned mid-month after inflation data for December came in relatively tame, alleviating some concerns about persistent price pressures.

Additionally, the market responded favorably to the administration's decision not to impose immediate tariffs on imports from China and other key trading partners. As a result, Treasury yields eased, and stocks rebounded, with strong earnings from major U.S. banks, airlines, and technology firms further supporting the recovery.

By the final week of the reporting period, however, the S&P 500 pulled back again, retreating about 1 percent following the Federal Reserve’s decision to pause rate cuts. The news surrounding China’s DeepSeek AI technology also weighed on AI-related stocks, contributing to renewed market weakness.

Market Volatility and Investor Behavior

Market volatility picked up during the early part of the month, coinciding with Wall Street’s struggles. The Cboe Volatility Index (VIX) briefly spiked above 22 on January 13, the same day the S&P 500 hit its monthly intraday low below 5,800.

Concerns over new restrictions on U.S. chip exports further fueled the uncertainty. However, as inflation data eased and corporate earnings provided a more optimistic outlook, volatility subsided, with the VIX dropping below 15 in late January.

The market took another hit on January 27 after reports emerged regarding China’s DeepSeek AI advancements, which impacted sentiment surrounding AI-heavy technology names. The VIX subsequently rebounded above 22 on an intraday basis before settling below 18 by month’s end.

Stock Preferences Among Schwab Clients

Despite the broader market fluctuations, Schwab clients continued to exhibit strong interest in technology and AI-related stocks, with buying activity focused on some of the most recognized names in the sector.

Top stocks bought by Schwab clients in January included:

- NVIDIA (NVDA): As a leading force in AI and semiconductor technology, NVIDIA remained a top pick among investors, despite the volatility in AI-related stocks.

- Palantir Technologies (PLTR): The AI-driven analytics firm continued to attract attention as a strategic play in the evolving AI space.

- Apple (AAPL): Investors maintained confidence in the tech giant, likely due to its strong consumer demand and product ecosystem.

- Tesla (TSLA): Although facing challenges in the EV market, Tesla remained a favorite among Schwab clients, possibly due to optimism around its long-term growth prospects.

- Microsoft (MSFT): With its expanding AI footprint and strong cloud computing business, Microsoft continued to be a key holding for investors.

hile Schwab clients showed confidence in tech-heavy names, they also reduced exposure to certain companies, particularly in the consumer discretionary and financial sectors.

Top stocks net sold by Schwab clients included:

- Walt Disney (DIS): Concerns over streaming profitability, declining theme park attendance, and broader economic uncertainty may have driven selling pressure.

- Boeing (BA): The aerospace giant faced renewed scrutiny after safety concerns emerged regarding its aircraft, leading some investors to trim positions.

- Bank of America (BAC): The financial sector faced pressure as questions remained about the interest rate environment and its impact on banks’ profitability.

- Walgreens Boots Alliance (WBA): Investors appeared to be moving away from Walgreens as the retail pharmacy sector struggled with margin compression and shifting consumer habits.

- Starbucks (SBUX): Weaker consumer spending, labor disputes, and questions about store traffic trends may have led some investors to exit Starbucks positions.

Outlook for February and Beyond

Heading into February, the market faces several key questions that could determine the direction of investor sentiment and trading activity.

- Inflation Trajectory: The January inflation report will provide fresh insights into whether the Federal Reserve’s policies are effectively containing price pressures. Any surprises could influence the outlook for interest rates and market performance.

- Federal Reserve Policy Decisions: With the Fed maintaining a cautious stance on rate cuts, market participants will closely monitor any signals about the timing of future policy adjustments.

- Earnings Season Developments: While early results from banks and tech firms have been strong, upcoming earnings reports from consumer-focused and industrial companies will provide a broader picture of economic health.

- Geopolitical Risks: Trade policy discussions and any new developments in U.S.-China relations will remain key factors that could drive volatility.

Overall, the decline in the Schwab Trading Activity Index in January suggests that retail investors took a more measured approach to the market amid uncertainty. While the technology sector remains a focal point of investment, ongoing volatility and policy-related risks could influence trading behavior in the months ahead.