WEEKLY MARKET SUMMARY

Global Equities: US stocks had a volatile week, starting off with a Monday selloff and recovering Friday before news dropped that tariffs on Mexico, Canada, and China would be imposed effective February 1st. Stocks turned negative on the news, bringing the S&P 500 to a weekly loss of -1.0%. The Nasdaq Composite bore the brunt of the selling, down -1.6%, while the Dow Jones Industrial Average finished up 1.5%. Small Caps were also down during the week, ending with a -0.9% loss. Developed International stocks closed out the weekly session flat, while Emerging Markets slipped -0.5%.

Fixed Income: No surprises from the Fed or inflation data was good news for bond markets as the 10-Year Treasury yield eased to 4.55%. Yields jumped in response to the tariff news due to their potential inflationary effects. High yield bonds also shed weekly gains in response to the tariff news, ending the week flat.

Commodities: US West Texas Intermediate (WTI) Crude prices were lower during the week in response to growing stockpiles of domestic oil. The tariffs announced Friday include a 10% tax on Canadian crude, an exemption from the 25% rate being imposed on other goods. WTI bounced on Friday to end the week around $73.50. Gold prices rose to a new all-time high of $2,834 on concerns over potentially inflationary government policies.

WEEKLY ECONOMIC SUMMARY

No Surprises from Fed: The Federal Open Market Committee (FOMC) left rates unchanged and provided little insight into its path moving forward. The FOMC removed a sentence from its commentary regarding inflation making progress towards the Committee’s 2% target, which markets took as a hawkish change. Chairman Powell dismissed this notion, however, and focused on the strength of the US economy in his press conference with reporters. That economic strength, Powell stated, affords the Fed flexibility to be patient with rate cuts and evaluate the impact of the Trump administration’s economic policy initiatives.

Core PCE: The Fed’s favored inflation metric, the Core Personal Consumption Expenditure (Core PCE) index, was in line with estimates in December. Core PCE, which excludes food and energy, increased 0.2% during the month and rose 2.8% for the year. The broader headline PCE number rose 0.3% for the month and 2.6% annually. Energy prices were up 2.7% during the month while food rose just 0.2%. The good news is that the annual rate could decline significantly if there is no early 2025 surge as there was in 2024. The abnormally hot inflation from January-March 2024 will gradually fall off the data set for the annual calculation, so inflation could be much closer to the 2% target barring any unforeseen uptick in the coming months.

Big Tech Earnings: It was arguably the most important week of earnings season, with Tesla (TSLA), Microsoft (MSFT), Meta (META), and Apple (AAPL) all reporting. Tesla missed estimates on an 8% revenue decline and another quarter of falling sales. Shares rose, however, on promises that the long-delayed autonomous vehicle rollout would occur in the first half of 2025. Microsoft earnings were the opposite, with the software giant eclipsing analysts’ estimates only to be rewarded with a -6% pullback in shares due to disappointing Azure cloud business growth. Meta beat estimates and continued to spend aggressively on artificial intelligence. Apple also beat estimates to post its all-time best quarterly results, although Chinese iPhone sales were disappointing, and shares ended the post-earnings session lower.

CHART OF THE WEEK

The Chart of the Week shows the categories of goods most likely to be impacted by the tariffs on Mexico, China, and Canada effective February 1st. Canada and Mexico will be subject to 25% tariffs, with a 10% exemption for Canadian oil. Chinese goods will face a 10% tariff. The intent of the tariffs is two-fold; to punish Mexico and China for the influx of immigrants and Chinese-made fentanyl coming across the border, and to encourage manufacturers to re-shore production to the US. The latter goal may be difficult to achieve through punitive tariffs, since manufacturers would have to pay US workers much higher wages and incur capital costs to establish domestic production facilities. Economic studies on Trump’s 2018 tariffs widely agreed that the result was US job losses and higher prices, as the costs of tariffs are borne by the importer and ultimately passed on to consumers. Yet, with the US operating from a position of economic strength, it could be that President Trump is merely attempting to flex his muscle with a “shock and awe” foray to what will eventually become a negotiation.