Weekly Market Insights 02.03.25

A Good January for Investors

Financial Markets

Although it had the potential to end badly, most financial markets around the globe finished with gains for the first month of 2025.  It was certainly an eventful final stretch, with DeepSeek’s AI breakthrough and the news of higher-than-expected tariffs against China, Canada, and Mexico—an interesting mix of friend and foe and elevated uncertainty.  Adding to the headlines, the Federal Reserve held rates steady at its first meeting of the year.

While the major equity indexes closed the week lower, they ended the month in solidly positive territory.  European stocks also finished the month in the green, a remarkable demonstration of investors’ faith in the market.

Economics

It is a wonderful time to write about economics.  With political developments, government releases, Federal Reserve monetary policy announcements, and tariff news from the White House, there is abundant content to opine on.  Investors have a robust appetite for lower interest rates, which is to be expected since lower interest rates have typically coincided with higher equity prices.  To the disappointment of investors and the President, the Federal Reserve announced its decision to hold the Fed Funds rate steady and signaled that it is in no hurry to adjust its policy stance.  Neither the Fed’s actions nor the corresponding market disappointment should be a surprise.  Presidents and investors have an instinctive desire for low interest rates.

However, the President’s desire for tariffs is an interesting one.  The intellectual argument against tariffs, except in extraordinary cases, is well-known and widely accepted.  We would also point out that President Trump has a strong incentive to see continued economic growth and lower inflation.  So, why impose tariffs against our longtime allies, Canada and Mexico?  It is even more interesting, considering that President Trump ran on how inflation hurts the middle class, particularly the lower middle class.  It seems counterintuitive to slap the highest tariffs on the two countries that are the highest exporters of food products to the United States, putting pressure on food prices and a large portion of the lower middle class’s household budgets.

Overseas, Christine Lagarde and the European Central Bank (ECB) cut rates for a fifth time since beginning their easing cycle last June.  With the E.U. economic recovery still in the early innings, the ECB looks poised to continue to ease.

China is a very different story.  China, of course, has serious debt and banking problems, which have been well reported.  Alas, the country has a far more difficult challenge at hand.  It is a long-standing structural problem.  When China was advancing from an underdeveloped country, it focused on exports and neglected to develop strong domestic demand.  Unfortunately, that decision is plaguing the country now.  What may be surprising to some is that significant tariffs against China may help some other countries.  China has started to move production to other emerging market countries in an attempt to avoid tariffs.  Despite the current excitement and attention, there is still hope that the tariffs will be short-lived.

Conclusion

Having given some reason to be a bit concerned about inflation, the United States remains the strongest and most stable economy in the world.  Even if higher tariffs persist and lead to additional inflationary pressures, it likely won’t be significant enough to derail the Federal Reserve’s easing cycle completely.  As discussed above, the European Union is perking up and may deserve investor attention.  Having said that, even with all the confusion, the United States markets remain the place to be.

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