Market Volatility and AI Disruption

Economic Outlook: Week of January 28 - February 1, 2025

A week ago, markets hit record highs, with the S&P 500 surpassing 6,100 amid optimism over Trump-led deregulation. However, the introduction of China's AI product "DeepSeek" rattled tech stocks, leading to sharp declines in Nvidia and other major players.

Markets recovered slightly mid-week, but Trump’s sweeping new tariffs sent stocks plummeting again on Friday. The S&P 500 lost 30.64 points (-0.50%) to 6,040.63, while the Nasdaq dropped 54.31 points (-0.28%) to 19,627.44. The Dow tumbled 337.47 points (-0.75%) to end at 44,544.66. For the week, the Dow gained 0.3%, while the S&P 500 and Nasdaq lost 1.0% and 1.6%, respectively.

Tariff Shock: The Economic Impact

Despite a solid economy, the newly imposed tariffs threaten global trade. The administration has enacted (but now suspended for Mexico and Canada):

• 25% tariffs on Mexican and Canadian goods
• 10% tariffs on Canadian energy products
• 10% tariffs on Chinese goods

These tariffs impact $2.1 trillion in trade.  Some estimates project as much as a 1.5% reduction in U.S. GDP, with Canada and Mexico facing recession. Inflation would be expected to rise, pushing the economy closer to a stagflation environment — a mix of slow growth and rising prices.

Tariff Uncertainty and Trade Negotiations

Trump’s tariffs introduce significant uncertainty. While intended as leverage on issues like immigration, their permanence remains unclear, creating challenges for businesses and investors.

Notably, tariffs on Canadian and Mexican imports have been temporarily suspended for 30 days following border security agreements. This pause allows for negotiations but underscores the unpredictability of trade policies.

Analysts suggest the tariffs may be negotiation tools rather than permanent measures. However, the absence of clear timelines complicates strategic planning. Stakeholders should monitor developments closely.

Costs to Consumers and Businesses

• U.S. businesses could see an additional $700 million in daily tax burdens (Trade Partnership Worldwide).
• Higher energy prices: U.S. crude oil rose 2.3% and natural gas 7%. Diesel and jet fuel costs are expected to rise.
• Retail and consumer goods inflation: Tariffs covering $1.4 trillion in imports would raise costs, though inventories may delay immediate effects.

Global Trade Retaliation Begins

• Canada imposed 25% tariffs on $30 billion in U.S. goods, with another $125 billion in 21 days.
• Mexico announced equal tariffs but hasn’t disclosed specifics.
• China has implemented limited trade changes but may escalate.
• Potential EU tariffs loom, with Trump hinting at import taxes on European goods, including steel, aluminum, copper, and semiconductors.
• Automakers will be hit hard, as vehicle components cross borders multiple times before final assembly.

Looking Ahead

Some argue the first Trump administration's tariffs didn’t significantly impact inflation, but this round’s broader scope makes consequences harder to avoid. As supply chains recover from past disruptions, these tariffs introduce new volatility.

Investors are watching whether additional tariffs will materialize and how global partners respond. The long-term effects depend on how businesses and consumers adapt.

FTR analysts continue to monitor these rapid policy shifts, providing data-driven insights to help businesses navigate the evolving economic landscape.