NEWS
What Happened Last Week
Technology stocks took a beating Monday due to China’s DeepSeek firm suggesting that AI might possibly be accomplished much cheaper and with less computing power than originally presumed.
The Trump administration plans to implement a 25% tariff on the import of good from Canada and Mexico until these two countries can satisfactorily stop the flow of illegal immigrants and fentanyl across their borders.
Canadian energy imports will face a 10% tariff, while Mexico’s energy imports will face the full 25%.
Canada and Mexico have announced that they will counter with their own tariffs rather than meet the border demands.
Purchasing Managers’ Indexes for the Eurozone and the UK improved overall in January versus December, a positive sign for future economic growth.
The European Central Bank (ECB) cut interest rates to 2.75% on Thursday, with its Central Bank Chief estimating inflation to return to its 2% target around spring or summer.
US fourth quarter growth was an annualized 2.3%, not quite hitting expectations but still above the 20-year annualized average of 2.1%.
Consumer spending grew at 4.2% last quarter, the fastest in about two years. But after the first quarter this is projected to taper off.
How I See It
Stocks don’t need a lot.
What they need is a level playing ground (few disruptive new regulations), positive economic growth, and cautious investors.
Right now, uncertainty remains elevated due to the sheer number of changes being experienced in the government. No one knows how the economy will eventually balance out the cut in government spending (reducing GDP), the new tariffs, and the targeted regulation cuts and tax cuts (potentially improving GDP).
The tariffs, however, are no surprise to markets. For months now, investors have understood that these are a real possibility at least temporarily while the affected countries negotiate. This new trading environment has been largely priced in already, though the immediate impact on investor sentiment could cause markets to react unfavorably in the days ahead.
But much of the uncertainty that comes from the top down persists through the first two years of a President’s term. That uncertainty gets priced into markets, keeping them cautious.
But the thing that takes markets down is either 1) a totally unforeseen event which reduces expected global GDP by trillions of dollars or 2) markets get ahead of themselves in an extended period of very high optimism.
Right now, markets are relatively quite high on the optimism of strong business conditions and the continued impact and development of AI.
It’s fine for markets to be high in expectation of that. They can still achieve excellent returns even during times of strong optimism when they’re already high.
But what I hope to see this year is more moderate gains, preferably in the single digits to low double digits. If we see more than 15% for the whole year, it may be time to consider the risk more closely.