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Current Market Observations

February 4, 2025 | Weekly Commentary

Market returns were mixed last week, with the Dow Jones Industrial Average moving higher (+0.3%), the S&P 500 Index (-1.0%), and NASDAQ (-1.6%) both falling. Early Monday, technology stocks were rocked by a weekend story about a Chinese AI tool (DeepSeek) announcing that they had developed a powerful AI engine at a fraction of the cost of competitors like ChatGPT and CoPilot. While the story seemed incredible, as the week progressed, the facts became questionable, and many industry experts doubted the validity of the new technology. The news did not impact the results for January, as each primary index ended higher (see results below). The Wall Street “tenet” “as January goes, so goes the year,” will have to be proven over the next 11 months. Treasury markets rallied throughout the week, and the 10-year U.S. Treasury bond yield ended at 4.52%, thirteen basis points lower than the previous week. 

U.S. & Global Economy  

Last week’s economic data releases painted a picture of modest strength, with some mixed signals, though it’s important to note that month-to-month data can be volatile. Overall, however, the broader trends and the economic picture remain healthy. New home sales for December exceeded expectations, coming in at 698k, a possible sign that buyer’s sensitivity to high interest rates is subsiding. While durable goods orders for December fell by 2.2%, more than anticipated, it’s worth noting that orders excluding transportation rose by 0.3%, marking the fourth increase in the past five months. Jobless claims also came in lower than expected, pointing to continued strength in the labor market. The Federal Reserve held interest rates steady during its January meeting, highlighting that core inflation remains above its 2% target and disinflationary trends have slowed, reflecting a cautious approach amid ongoing economic growth. GDP growth for Q4 was 2.3%, slightly below expectations but still solid. Inflation remained in line with forecasts, as December’s PCE and core PCE indices showed a slight uptick. Despite some weaker data points, the overall picture suggests a resilient economy. 

Policy and Politics 

President Trump unveiled new tariffs on imports from Canada, Mexico, and China, set to take effect on February 4, 2025. The measures include a 25% levy on most goods from Canada and Mexico and a 10% tariff on Chinese imports. Some view these measures as part of Trump’s broader strategy to renegotiate trade policies that are unfavorable to the U.S. The tariffs aim to address issues such as illegal immigration and drug trafficking and promote domestic manufacturing. However, some economists warn that these actions could increase consumer prices, potentially increasing inflation by one percentage point and slowing economic growth by as much as 1.5 percentage points in 2025. They also foresee the risk of job losses due to reduced economic output and retaliatory actions from trading partners.

In response, Canada and Mexico announced their tariffs on U.S. exports, which could hurt American businesses and escalate trade tensions. The broader global economy may also face disruptions, with strained supply chains and decreased demand for U.S. exports. While the administration views these tariffs as a strategic approach to address domestic issues, they come with risks, including the potential for stagflation (slower growth coupled with rising inflation) and further instability in global trade. 

Economic Numbers to Watch This Week 

  • U.S. ISM manufacturing for Jan 2025, previous reading 49.3% 
  • U.S. Construction spending for Dec 2024, the previous reading was 0.0% 
  • U.S. Job Openings for Dec 2024, the previous number was 8.1 million. 
  • U.S Factory Orders for Dec 2024, the previous reading was –0.4% 
  • U.S. ADP Employment report for Jan 2025, the previous number was 122,000 
  • U.S. ISM Services for Jan 2025, the previous reading was 54.1% 
  • U.S. Weekly Jobless Claims for the week of Feb 1, 2025, the previous number was 207,000 
  • U.S. Employment Report for Jan 2025, the previous number was 256,000 
  • U.S. Unemployment Rate for Jan 2025, the previous reading was 4.1% 

The week ahead will be marked by continued attention on the impact of President Trump’s new tariffs. Investors will also be closely watching the January Nonfarm Payrolls report for insight into the health of the labor market, along with data on job openings in the U.S. Earnings reports from major companies like Google, Disney, QUALCOMM, Amazon, and Eli Lilly will take center stage, with particular focus on how management teams are responding to the newly implemented tariffs and their potential effects on business operations and profitability. As these key developments unfold, markets will likely stay on edge, balancing concerns over trade tensions with corporate earnings and economic data. If you have any questions or need more information, feel free to reach out to your advisor at Valley National Financial Advisors.