Tariff Man Strikes

Weekly Newsletter: February 3, 2025

The new Marvel Super Hero (?) Tariff Man strikes and not with countries many thought would be the first place he would strike. Two of our largest trading partners, Canada and Mexico, for different reasons, are the initial targets. There was plenty last week to watch, from the "introduction " of DeepSeek, a cheaper AI program from China, then tech earnings, followed by the Fed meeting. For all the noise, markets finished the week with a modest decline. DeepSeek looked as though it would deep-six the tech sector. It did impact NVidea and Microsoft, which disappointed on earnings. Overall, big tech held up ok. The Fed held rates steady and indicated they would be dragging their feet on future rate cuts as inflation remains sticky above the Fed's desired 2% target. This week the employment report is released, which should show still decent job growth along with good wage gains. It should not change the interest rate picture, but it may provide additional information on the strength of the economy.

Early last week was all about the cheaper version of AI, DeepSeek. It calls into question the huge spending on chips and power generation. By the end of the week, few are certain that all the hype is true. The big chip players and some utility stocks took it on the chin for the week. By Friday the focus shifted to Tariff Man and what he would do with his election threats. The weekend brought Canada and Mexico into the mix and questions about the costs/benefits to the US consumer. The first place the tariff impact shows up is in the currency market. The dollar tends to strengthen against the "tariffed" currency. Secondary impacts may not show up for months in either higher prices or newly negotiated prices that may dull the impact. Finally, as has been highlighted in various areas, this may be used as a negotiation tactic. Like last week, this week will likely be another crazy one as investors try to recalibrate both the economic data and corporate earnings.

Yields have been ticking lower over the past few weeks as tariff chatter picks up. It is thought that higher tariffs would slow economic growth, pushing the Fed to cut rates to keep the party going. Commodity prices turned significantly lower last week. When and how they bleed through to inflation data remains a question. Since September, prices have jumped over 10%, while not moving headline inflation. The debate remains heated about whether rate cuts are needed or have an impact on specific parts of the economy (egg prices!).

It was another week of non-technology/growth doing well vs. the rest of the market. Small, value, and international had good weeks relative to the large growth sector. The switch to other parts of the market has been anticipated for quite some time with plenty of false starts. As has been highlighted often, the broad market and especially growth is expensive relative to historical norms, but the timing of any correction remains elusive. Investments outside of growth, even bonds remain attractive, but the ride will be very bumpy as short-term geopolitical factors take their turn on center stage. Patience is a virtue, but difficult to implement when investing. This year will test investors' patience.

There will be plenty of Fed speakers this week reacting to the tariffs and providing opinions about monetary policy.

The opinions expressed in the Investment Newsletter are those of the author and are based upon information that is believed to be accurate and reliable but are opinions and do not constitute a guarantee of present or future financial market conditions.