It’s only the first week of February, but lots has already happened! On top of everyone and their brother getting sick, a couple major market shakers have already come and, potentially, gone.
DeepSeek
On January 27th, news broke that a Chinese startup called DeepSeek developed and trained an AI reasoning-model for only $6 million (though later amended). This compared to US rivals OpenAI and Google requiring $78 million and $191 million to develop and train their models, respectively. This significant cost difference initially led to a severe rethinking of tech stocks soaring valuations, initially sending the S&P down -2.5% and the tech-heavy Nasdaq down more than -4%. Hit the hardest were chip makers Nvidia and Broadcom, down -20% and -17% on that first day. If AI development efficiencies have really taken such a huge step forward, the demand for chips may be drastically lessened.
Fortunately for investors, the emotional trading abated and 70% of S&P 500 companies finished the day up. JPMorgan wrote, “While investors shouldn’t be worried about U.S. tech losing its AI advantage anytime soon, they should be worried about crowding, concentration and elevated valuations. There are a lot of reasons for enthusiasm, but it should be caveated with caution, especially amid the unpredictability of technological revolution.” There’s still much to learn about DeepSeek’s AI model and tech valuations may continue to teeter-totter, but the S&P 500 and the Nasdaq remain positive year-to-date.
Tariffs
A week after the DeepSeek AI selloff, news of Tariffs hit investors desks. Trump announced last Saturday he would impose 25% tariffs on Mexico and Canada, plus a 10% tariff on China by the middle of the week. Markets reacted decidedly negative, sending the S&P 500 down as much as -2% on Monday. By the end of the trading day, markets recovered by more than half after confirming a one month pause on the tariffs placed on Mexico’s imports. By the end of the day Tuesday, nearly all of the losses were recouped in the index once the tariffs on Canadian good were also paused for the month.
The threat of tariffs still have many people worried. For a better understanding of who pays for a tariff, next is an excerpt from the Wall Street Journal.
“The firms importing the goods, many of which are American individuals and businesses, will pay for the tariffs.
Who bears the ultimate burden of the tariffs however isn’t so straightforward. An American importer can pass along the cost of tariffs to American businesses or consumers by raising its prices. Alternatively, a foreign exporter might ultimately shoulder the burden if it cuts prices to avoid losing sales.
If the tariffs prompt U.S. companies to turn to other countries for imports, those levies can be avoided, of course. In those instances, however, Canadian, Mexican and Chinese workers might lose jobs. Under that scenario, Americans would also likely pay higher prices, with more goods coming from alternative suppliers that face higher costs. If production shifts to the U.S., Americans would likely pay higher prices as well, though some of that would likely go toward the wages and profits of other Americans.”
There’s been enough news in the first week of February to fill the whole month. Volatility has been a constant as the market whipsaws between emotional highs and lows. Even with all of this, stock and bond markets are still chugging along nicely with major indices in the green, though there is a surprise leader! The revaluation of tech is a big reason why the S&P 500 is performing better than the Nasdaq to begin the year, up 3.15% to 2.00%. But the surprise for many is the International Developed stock index leading the way, returning 5.35%. There is, of course, no guarantee this short-term trend will continue. However, being invested in a diversified allocation can help ensure participation in this recent positive performance.
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