
AI Announcement Drives Tech Stocks Down; Bonds Gain
Good morning, and thanks for the end of January! Hopefully, we begin to see some nice days, as we are already seeing the longer daylight hours.
The Dow (+0.3%), NASDAQ (-1.6%), and S&P 500 (-1.0%) finished the week mixed. Taxable bonds were up 0.4% and tax-free municipal bonds were up 0.5%. The 10-year Treasury yield fell 0.07% to finish the week at 4.55%.
The markets last week were driven more by headlines than economic data. So, let’s start with the data. The Fed-favored inflation gauge, Personal Consumption Expenditures (PCE), came in line with investors’ expectations and were comparable to last month, suggesting that inflation is moving neither upward nor downward. The Fed also announced no changes to interest rates at its meeting, and Fed Chairman Powell indicated the next likely move would be a rate cut, but not until toward the second half of 2025. Corporate earnings reports also came in positive, but nothing extraordinary to capture headlines.
On the other hand, the headlines drove the markets last week. It started on Monday with the Chinese company, DeepSeek, announcing that its artificial intelligence (AI) platform performed as well as US provides, but at a fraction of the cost. This caused AI-related stocks and energy companies to plummet, especially chip manufactures. However, most of those stocks recovered a good portion of their losses by the end of the week. The chart below shows a comparison of the Magnificent 7 (AI stocks) compared to the S&P 500 equal weight index, demonstrating that the markets were predominantly impacted by only those AI-related companies.
More headlines this week, as President Trump announced the implementation of stiff tariffs on Mexico, Canada, and China. If those tariffs stay in place for an extended period of time, it could present inflationary pressure on Americans. However, many pundits believe that these tariffs are being used by Trump as leverage for various reasons, such as immigration and the flow of fentanyl into the US. These tariffs could also lead to retaliatory tariffs by other countries, possibly resulting in trade wars. Time will tell to see if these tariffs remain in place for a long time, and to what extent these tariffs will impact the US economy.
Have a great day and terrific week! Please see the attachments from our CFA consultants which provide their narrative for last week, as well as the month of January.
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