@theMarket: A Roller-Coaster Week in the Markets

As January ended, the pace of activity across global financial markets had traders lurching from one event to another. If this is a prelude to what investors can expect from 2025, fasten your seatbelts because this could be a bumpy ride.

 

Monday opened with a huge move down led by technology stocks. The trigger for the decline was DeepSeek, a small, little-known Chinese private company that announced a breakthrough in artificial intelligence. It created a ChatGPT-like AI model with all the capabilities of companies like OpenAI, Google, and Microsoft but at a fraction of the cost.

 

The company claims it has spent just $5.6 million on computing power for its base model. This compares with the leading companies in the U.S., which have already spent billions of dollars in developing their AI technologies and billions more that they plan to spend.

 

The U.S. semiconductor company that supplies the most advanced chips to fuel the coming AI generation, Nvidia, plummeted and took the NASDAQ down by 3.1 percent.

 

As the week progressed, American analysts and corporate AI CEOs rushed to assure investors that this was not the end of U.S. AI. In fact, the breakthrough simply meant that artificial intelligence could now be implemented faster while penetrating deeper into a whole host of industries with less cost and less use of energy.

 

And while the markets were wrestling with this shockwave, Washington was generating its own brand of turbulence. The last 10 days have seen a flurry of executive orders from the White House. Orders to freeze spending (later reversed), buyouts for federal employees, declaring a national energy emergency, and tariff threats were just some of the memorandums, proclamations, and executive orders that have kept markets and corporations working overtime to digest.

 

As the Trump administration's immigration deportation begins to gather speed, videos of empty construction sites, farm fields, factories, and warehouses are being posted on social media. They supposedly claim that illegal immigrants are hiding and staying away from work sites amid the government's crackdown on illegal immigrants.

 

Whether disinformation or fact, given the sky-high prices at the grocery store, some consumers see this as another consequence of government intervention.

 

Switching gears, the Federal Open Market Committee Meeting held on Wednesday decided to keep interest rates on pause. As usual, Chairman Jerome Powell  said the Fed continued to be "data dependent." He acknowledged that the new administration's fiscal policies would impact the economy, but it was too soon to say how.

 

Beyond all these events, markets are awaiting President Trump's tariff decisions, which are expected this weekend. He has said that Canada and Mexico could be the first countries targeted with 25 percent across-the-board tariffs unless they showed substantial progress on curbing immigration at the borders and a reduction in drug smuggling into the U.S. 

 

The facts are that no one knows what the president will do until he does it. Investors could wake up on Monday morning with tariffs levied on Mexico and Canada or not. Given this backdrop, there is little value in trying to predict market direction on fundamentals such as earnings, revenues, etc.

 

I will say that earnings so far this quarter have been good. S&P 500 companies' earnings are up on average 13 percent. Technology companies even more, while small-cap companies in an important reversal are up 13 percent. It also appears, as I mentioned last week, that the run in the dollar may be over for now. Of course, that could change overnight if the Trump tariffs are implemented. However, if the dollar continues to pull back, investors should consider the merits of investing in precious metals and emerging markets, as well as Bitcoin.

 

Technically, after the sharp decline we experienced this week, markets should re-test those lows before bouncing back. Instead, they bounced. It doesn't have to but I would not discount the risk of  80-100 points of downside on the S&P 500 Index from here on the back of a tariff announcement.

 

In my last column, I warned readers to expect a decline. I advised those with cash to use that as a buying opportunity. Any further declines into next week would be another opportunity to add to positions.

 

Bill Schmick is the founding partner of Onota Partners, Inc., in the Berkshires. His forecasts and opinions are purely his own and do not necessarily represent the views of Onota Partners Inc. (OPI). None of his commentary is or should be considered investment advice. Direct your inquiries to Bill at 1-413-347-2401 or email him at bill@schmicksretiredinvestor.com.