To many, this past week has been little more than the lull between the NFL conference championships and the Super Bowl. However, to investment types, it was chock full of important information.
There was a Federal Open Market Committee (FOMC/Fed) meeting. The Bureau of Economic Analysis (BEA) released its first take at calculating Gross Domestic Product (GDP) for the 4th Quarter of 2024. Analysts waited with bated breath until Friday to get the PCE Price Index numbers. Finally, Apple, Meta Platforms (Facebook), Microsoft, and Tesla all reported their most recent quarterly earnings.
So too did the following companies, and this is a partial list: Altria Group, American Express, AT&T, Boeing, Caterpillar, Chevron, Colgate-Palmolive, Exxon Mobil, General Motors, International Business Machines, Lockheed Martin, United States Steel and Whirlpool. However, it isn’t the 1980’s or 1990’s any longer. So, those firms didn’t make a lot of headlines with their reports, at least not nationally.
If that wasn’t enough, we had the market freakout on Monday. That wasn’t fun. Some Chinese artificial intelligence (AI) company named DeepSeek claimed it made massive advancements in the field for a pittance of the cost and fraction of the hardware when compared to the behemoth American AI leaders.
Let’s just say investors didn’t like what they initially heard. However, I am old enough to know “if it seems too good to be true, it probably is.” As an aside, DeepSeek sounds more like a brand of laundry detergent than an industry disruptor, one which claims to have made some very important technological advancements.
As for all that stuff we had been anxiously awaiting? Well, the Fed didn’t really do anything and reiterated what it had previously told us. Meh. The GDP report was pretty much in line with most estimates. So was the data in the PCE Price Index release. Again, meh. Finally, while Meta Platforms blew it out of the water, in a good way, you could pretty much sum up the earnings releases of the other tech giants as: “fair enough. It could have been worse.”
At least, that is this writer’s humble opinion.
All told, by the time the smoke settled, the dust cleared, and the cows came home, the S&P 500 was up a very modest amount for the week prior to lunch. The Fed is in a holding pattern, which we knew it would be. Finally, the economy is cooling a smidgeon from last Summer and Fall’s somewhat torrid pace, which we all suspected would be the case.
Frankly, this week had the feel of a basketball game where one team quickly jumps out to a double-digit lead, and then they basically just trade baskets until the final buzzer. That is until around lunchtime today, when the markets got extremely worried about tomorrow’s tariff deadline, line in the tariff sand or what have you.
If Ottawa and Mexico City don’t blink, the Trump Administration is going slap a 25% tariff on each of those countries tomorrow. That could be a major problem for those export-heavy economies. For its part, China is to get a 10% levy. However, if that is all it is, Beijing is probably cool with that.
Consider this, Mexico’s exports to the United States were $493.1 billion in 2022, and total trade was $855.1 billion. In that year, Mexico’s entire GDP was around $1.463 trillion. You don’t have to be a brain surgeon to determine exports to the United States, alone, are extremely important to the overall health of the Mexican economy. What is that number? 33.7%. For Canada, overall trade with the United States was $908.9 billion in that same year. That represented fully 42% of the $2.161 trillion Canadian economy in that year.
By comparison, combined total trade with Canada and Mexico was equal to about 6.9% of total U.S. GDP in 2022. To be sure, American consumers might not like the prospect(s) of higher prices on Canadian and Mexican-made products. However, Canadians and Mexicans are undoubtedly apocalyptic. Let’s just say the U.S. would win this trade war if it gets to that.
However, please don’t misunderstand what the Administration is doing here. These threatened tariffs aren’t economic policy, at all. They are foreign policy. In this instance, to get them to help enforce U.S. border/immigration policy, essentially.
You could call it being a bully if you want. However, the tariffs themselves aren’t necessarily permanent. It pretty much depends on how badly the politicians in either foreign country want to trade with the United States.
If my assumptions are correct, they will be defiant to their domestic press and mostly pliant at the negotiating table with U.S. officials. Regardless, it isn’t going to be pretty.
After last week’s missive, you might think I am somewhat cavalier about the punitive tariffs the Administration is throwing around like candy from a Mardi Gras float. I am and I am not. Make no mistake about it. Tariffs would be an impediment to trade, and that is a bad thing for economic activity. However, the White House’s goal is less to restrict trade than it is to get foreign countries to ‘toe the line’ or play by its rules.
And what is the old expression? Money talks? I suppose we will see just how loudly it does over the weekend.
So, that is how we ultimately ended in the red for the week. It wasn’t DeepSeek that did it. Nor did the economic reports or earnings releases. It was the threat of tariffs on Canada and Mexico if they don’t ‘do more’ to stop the flow of illegal immigration into the United States.
We will have to see what the end outcome is, but I am hopeful ‘this too shall pass,’ and investors can get back to worrying about other things.
Thank you for your continued support. As always, I hope this newsletter finds you and your family well. May your blessings outweigh your sorrows on this and every day. Also, please be sure to tune into our podcast, Trading Perspectives, which is available on every platform.
John Norris
Chief Economist
Please note, nothing in this newsletter should be considered or otherwise construed as an offer to buy or sell investment services or securities of any type. Any individual action you might take from reading this newsletter is at your own risk. My opinion, as well as those of our Investment Committee, is subject to change without notice. Finally, the opinions expressed herein are not necessarily those of the rest of the associates and/or shareholders of Oakworth Capital Bank or the official position of the company itself.