Wentz Weekly Insights
Busy Week With Fed, Earnings, Economic Data, and Tariffs
U.S. stocks saw a rotation last week with value outperforming growth as the Dow gained 0.27% while the S&P 500 fell 1.00% and Nasdaq fell 1.64%. Most of the week’s declines came Monday after the technology sector sold off 5.6% for its worst day in over two years. The reason was around the concern a new Chinese AI (artificial intelligence) model performed as well as US versions at a fraction of the cost using less sophisticated chips, causing concerns over demand for many chip suppliers and energy related (due to electricity demand) stocks.
Outside of the news in the AI space, it was a very busy week with a lot of economic data, earnings, central bank meetings including the Fed, and political drama.
The first Fed meeting of 2025 concluded Wednesday with no change in policy but the policy statement leaned a little more hawkish. The changes to the statement were minimal and included the addition to the wording “unemployment has stabilized at a low level,” and changed the wording that the labor market has remained solid instead of “has eased.” It also took out the line that inflation has made progress and instead said “inflation remains somewhat elevated.”
In Chair Powell’s press conference, he down played the changes noted above when describing inflation but did note the Fed has less confidence in inflations progress than it did several months ago. Again, regarding Trump and tariffs he said the Fed does not want to assume what will happen and prefers to wait and see what action Trump takes and how it impacts the data. When asked if a March rate cut (the next meeting) was on the table, he responded the committee doesn’t see the need to be in a hurry, suggesting they are on pause until at least into late spring. He also suggested the Fed has belief inflation is set for further progress, but “having it” is what’s needed.
Stocks briefly turned lower after the release of the statement then recovered those loses somewhat during the press conference. The odds on where rates will be at the end of the year tilted to less rate cuts, but the consensus remains two rate cuts for the year, with the first taking place in June.
Earnings reports ramped up last week, particularly on mega cap and tech companies. The highlights were from Microsoft, Meta, and Tesla. Microsoft stock lagged after its earnings due to a deceleration in Azure growth (its cloud computing segment) however there was positives on the AI side, with the AI business revenue run rate surpassing $13 billion. Tesla was lower after its results as most performance metrics were lower than expected but reiterated its new and lower price vehicle models remain on track and were optimistic on delivery growth in 2025. Meta (Facebook) was a standout with shares rising as it beat estimates on most metrics driven by AI initiatives and suggested its massive investments will provide longer term strategic advantage.
The main economic data print was on GDP (gross domestic product) which increased at a slower than expected 2.3% annualized rate in the fourth quarter, slowing from the 3.1% pace from the third quarter. However, the core components were quite strong – consumer spending (which makes up nearly 70% of US GDP) remained the strongest part of the US economy. Spending grew 4.2% in the quarter, the fastest since Q1 2023, and contributed 2.8% to the headline number. Government spending once again contributed a large amount to GDP, increasing 2.5% in the quarter which contributed 0.4% to GDP. Residential investment grew 5.3%, while business fixed investment and inventory growth were detractors to GDP. Overall, the details to the report were better than the headline suggested and the economy remains solid.
Last week included the personal income and outlays data as well which included the PCE price index, the Fed’s preferred inflation reading. There were no surprises here as everything came in as expected with the index up 0.3% in December for the third consecutive month and the core index up 2.8% over the past 12 months, however still over the target of 2.0%.
But the big news over the weekend and what investors will be focused on going into the new week is the implantation of new tariffs. On Saturday, as promised, President Trump announced the US would impose 25% tariffs on all goods and services imported from Canada and Mexico, in addition to 10% tariffs on all imports from China. The White House provided the details in a fact sheet on its website that said the threat posed by illegal immigrants and illegal drugs constitutes a national emergency and results in executive action by President Trump.
Almost immediately Canadian Prime Minister Justin Trudeau announced retaliatory tariffs of 25% against $155 billion of U.S. goods. In addition, Mexico hinted it would retaliate although its President did not announce any specifics, while China threatened to retaliate and said it would file a lawsuit to the World Trade Organization. Trump said if the countries retaliate, it could be met with an increase or expansion of the already imposed tariffs. The three countries are the three largest trading partners to the U.S.
One of the more obvious concerns for investors and American consumers is what effect this will have on inflation. It will almost certainly cause prices to go up on specific goods/services but the long-term effect on inflation and growth is unknown. Due to the uncertainty, stocks are on pace to open nearly 2% lower as of this writing Monday morning. What we do know from the first Trump administration is the tariff threat is used as a negotiating tactic and was successful in Trump’s first term, so we expect it to bring the countries to the negotiating table.
Week in Review:
U.S. stocks were mixed but mostly lower last week with the average stock (using the equally weighted S&P 500) down 0.50%. Value outperformed growth with the major indexes finishing as follows: Dow +0.27%, Russell 2000 -0.87%, S&P 500 -1.00%, and Nasdaq -1.64%. Treasuries were higher as yields fell across the curve on uncertainty. The 2-year Treasury yield fell 6 basis points to 4.22% while the 10-year fell 9 basis points to 4.54%. The dollar continues its run higher with the dollar index up 0.87%. Gold set a new high after rising 1.27% while Bitcoin fell 2.30% and oil declined 2.85%.
Recent Economic Data
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GDP: Fourth quarter GDP grew at a slower pace than expected and a moderate slowdown from the third quarter. GDP increased at a 2.3% annualized rate in Q4 versus the expected 2.6% increase. The strongest part of GDP is the largest part of our economy – consumer spending, which grew a quite strong 4.2% in the quarter, the fastest since Q1 2023, and contributed 2.8% to the headline GDP number. The increase in consumer spending was split evenly between goods and services. The next biggest contributor to GDP was government spending at 0.4% due to a 2.5% increase in overall spending. Residential investment (new housing) grew 5.3%, contributing 0.2%, while nonresidential investment fell 0.6% (due to a drop in equipment), contributing a negative 0.3%. Net exports saw little change. Finally, the largest detractor from GDP was inventory growth which contributed -0.9% to GDP. A more accurate measure of growth in the US, final sales to private domestic purchasers, was up 3.2% in the quarter.
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Personal Income & Outlays: Personal income rose 0.4% in December as was expected, a slight uptick from the 0.3% increase last month, with wages and salaries up 0.4%. Incomes are up a quite strong 7.6% over the past year, while wages/salaries are up 4.9%. Government income has been rising at a faster pace of 6.1%. Consumer spending was very strong and has continued to surprise. It grew 0.7% in the month, coming off a 0.6% increase from November, and is up 7.2% over the past year. Good spending rose 0.9%, up 7.2% y/y, and services spending rose 0.6%, up 9.6% over the past year. The PCE price index increased 0.3% as expected and for the third consecutive month the inflation measures made no progress. Core PCE rose 0.2% and is up 2.8% over the past year, unchanged from November’s annual rate.
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New Home Sales: The number of new home sales for December increased 3.6% from November to a seasonally adjusted annualized rate of 698,000. This is 6.7% higher from the pace one year earlier. For all of 2024, 683,000 new homes were sold, a 2.5% increase from 2023 of 666,000. Similar to existing homes, the number of new homes on the market has been steadily increasing, up 33k over the past year to a total inventory of 494,000, the highest since 2008. The median price of a new home was $427,000, down 0.8% from a year ago.
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Case Shiller Home Price Index: The Case Shiller home price index showed home prices across the country rose an average of 0.4% in November (seasonally adjusted, and fell 0.1% non-seasonally adjusted). Home prices have seen a 3.8% annual increase as of November, up from the 3.6% annual gain the month prior. There are pockets of above trend growth in home prices, but national home prices in general are trending below historical averages. Cities with the highest annual increase include New York (+7.3%), Chicago (+6.2%), and Washington (+5.9%), with Tampa the only seeing a decline of 0.4%. Cleveland was near the top with a 5.4% increase in annual prices.
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Consumer Confidence: The Conference Board’s consumer confidence index was 104.1 for January, below expectations and a drop of 5.5 points from December for the second straight month. The index is at the lower range of where it has trended over the past two years. The present situations index fell sharply, dropping 10 points to 134.3 while the expectations index fell 2.6 points to 83.9, however remained above the key threshold of 80 that historically signals recession conditions.
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Jobless Claims: The number of jobless claims the week ended January 25 was 207,000, down 16,000 from the prior week with the four-week average down slightly at 212,500. The number of continuing claims fell 42k to 1.858 million. The four-week average was up slightly to 1.872 million.
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Employment Cost Index: The employment cost index, another data point the Fed looks at closely to follow labor costs, increased 0.9% in the fourth quarter, meeting expectations and a little higher than 0.8% from Q3. Wages and salaries increased 0.9% while benefits increased 0.8%. The index is up 3.8% over the past year.
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Durable Goods Orders: Durable goods orders fell 2.2% in December, adding onto November’s 2.0% decline, and a complete opposite of the 0.8% increase that was expected. Transportation declined 7.4% and was the main reason for the headline decline. Orders excluding transportation increased 0.3%. Durable goods orders are important because they feed into factory orders which feeds into the business investment part of GDP. The core measure, shipments of nondefense capital goods excluding aircraft was solid, increasing 0.6%, after a 0.4% increase the prior two months.
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Money Supply: The money supply (the amount of cash, deposit at banks, and money market balances) has seen two dramatic moves since the pandemic, rising a record 41%, or $6.32 trillion, from the beginning of the pandemic thru April 2022, then declined a record $1.06 trillion from then until October and surprisingly did not come with a recession. Since then the money supply has increased 14 consecutive months, rising another 0.4%, or $85 billion, in December and seeing an increase of $808.4 billion in all of 2024, a 3.9% increase. This is still a much faster than normal growth rate in the money supply, something which could keep upward pressure on inflation as there is substantially more money out there chasing the same amount of goods/services
Company News
- Microsoft/TikTok: Trump said Microsoft is one of the top companies on taking over TikTok, confirming it when asked by reporters. He still says he would like the U.S. to have 50% ownership in any joint venture that comes from the acquisition. Other confirmed interested companies include Oracle, Perplexity AI, and Musk.
- DeepSeek:
- Monday’s selloff in tech stocks, specifically those related to AI, was sparked by news over the weekend that a Chinese company DeepSeek developed an AI model and chatbot that is as competitive as US models but was built at a fraction of the cost. Barron’s reports OpenAI’s ChatGPT model reportedly cost around $100 million to develop and train, while DeepSeek’s underlying model was made in under two months and cost less than $6 million to train and develop. It adds the worry was if training and running AI models requires much less computing, then the market for advanced semiconductors could go from undersupplied to significantly oversupplied.
- Bloomberg reported Microsoft and OpenAI are investigating if a group linked to the Chinese company DeepSeek obtained data output from OpenAI’s technology in an unauthorized manner. Microsoft notified OpenAI of its suspicion last fall that it “distilled knowledge” (in other words transferred knowledge from the much larger OpenAI model to its smaller AI model) from OpenAI, which it must pay for to integrate in its AI models/applications.
- The U.S. is now launching a probe to see if DeepSeek worked around export restrictions to get their hands on advanced chips by purchasing them through third parties via Singapore.
- Apple: Reports say Apple has been secretly working with SpaceX and T-Mobile to link its iPhones to the Starlink Satellite network, testing iPhones with the Starlink service. It has quietly added support for the Starlink network in its newest software update, released Monday, which would offer an alternative to Apple’s in-house satellite service.
- UPS: UPS said in its earnings release it had reached an agreement with Amazon to lower shipment volumes by 50% by the second half of 2026 as it aims to cut back on less profitable deliveries. UPS added that Amazon is its largest customer, but not its most profitable. Its stock fell after its earnings release as it provided forecast lower than estimates, adding the anticipated rebound in demand for its parcel services will not come this year as was expected.
- Amazon: The Wall Street Journal reported Amazon is increasing its advertising on X (formerly Twitter), just a year after it withdrew a majority of its advertising spending on X over concerns of hate speech. It adds other major companies that have removed advertising from X, like Apple, are in recent discussion about testing ads on the platform again
Other News:
- Tighter Export Restrictions: The Trump Administrations is exploring tightening its export restrictions on the sale of advanced chips to China, like Nvidia’s chips that are used to develop AI applications. Nvidia developed its H20 chips that are scaled-down products designed to meet the existing export restrictions to China and discussions have included these chips, according to Bloomberg. The report adds a decision is a ways off given the administrations early efforts to staff its departments.
- Treasury Secretary Bessent’s Plan: Trump’s Treasury Secretary pick Scott Bessent, who was confirmed last week by the Senate, said he is in favor of a universal 2.5% tariff on all imports to the U.S., then gradually increase them from there, part of the plan to increase negotiating leverage while avoiding a spike in inflation. Trump then said he wanted the universal tariffs to be “much bigger” than 2.5%, saying he has in his mind what he wants it to be. Trump said Thursday afternoon that he is planning to hit Mexico and Canada with tariffs of 25% to begin February 1, as was previously discussed from him during the first week in office. Markets immediately lost about 0.5% but recovered slightly after he said he doesn’t know if oil would be included or not.
- Buyout For Government Employees: Trump’s plan to reduce government spending and shrink the government workforce includes the government offering buyouts to federal employees who choose to resign by next week, letting employees “retain all pay and benefits regardless of your daily workload and will be exempted from all applicable in-person work requirements until September 30.”
- Central Banks:
- The European Central bank cut its benchmark rates another 25 basis points for the fifth time since June, bringing its key rate to 2.75%, while still describing policy as restrictive and saying it is unrealistic to have solid forward guidance due to the significant and rising uncertainty.
- The Bank of Canada cut its benchmark interest rates by another 0.25% (to 3.00%) for the sixth consecutive meeting and chose to remove forward guidance (on potential future policy moves) as it deals with “a lot of uncertainties out there” that includes the threat of tariffs from the U.S. In addition, it announced an end to its quantitative tightening program, becoming the first major central bank to end QT.
- Riksbank, the central bank of Sweden, lowered its benchmark interest rate for the sixth time this cycle, cutting by another 0.25% to 2.25% and signaled it may be down easing policy (lowering rates) for now to let the lower rates work through the financial and economic system.
Did You Know…?
Monday’s Selloff
After Chinese startup DeepSeek announced an AI model as competitive as US versions at a fraction of the price, AI related investments saw a sharp selloff to open the week on Monday. The technology sector saw its worst daily decline since November 2022, down 5.58%. A big part of that decline was from Nvidia – the stock fell 17% that day for its worst day since early 2020. In fact, the stock lost around $600 billion in market capitalization that day, the largest drop for any stock in a single day. For the Nasdaq index, which is technology focused, it was the sixth larger dollar value decline (the amount of total market cap lost among all companies in that index) as the index fell 3.07%, or about $1 trillion in market cap lost, roughly the same size as all of Germany’s stock market. Meanwhile, the Dow fared well, increasing 0.65% as investors rotated to value investments. The S&P 500 lost 1.46% at the same time, making it the index’s largest underperformance versus the Dow since 2000. The indexes ended up recovering over half the loss by the end of the week. We believe it was an excuse investors were waiting for to take profits on many tech names that have risen so much the past two years
WFG News
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The Week Ahead
It is going to be another busy week ahead, one highlight by many corporate earnings reports and another wave of important economic data. The big focus from data releases is on the labor market. The highlight is the Labor Department’s monthly employment report on Friday where current estimates see 165k jobs that were added in January. Other labor reports include ADP’s payroll data, jobless claims, the job openings and labor turnover survey, and productivity and costs – an important measure for longer-term economic growth. Manufacturing will also be in focus with the ISM and PMI manufacturing surveys and factory orders released. More data will come on trade for December, vehicle sales, construction spending, ISM non-manufacturing survey, and consumer sentiment. Regarding earnings, about 25% of the S&P 500 is scheduled to report. Notable companies reporting include Alphabet, Amazon, AMD, Palantir, PayPal, Spotify, Arm Holdings, Qualcomm, Uber, Chipotle, PepsiCo, Disney, Honeywell, Ford, First Energy, Eli Lily, and Pfizer. There will also be several notable investor day events. Fed speak ramps up with a number of Fed policymakers with public appearances scheduled. On the political side, tariffs will be the hot topic while RFK will see confirmation vote for Health Secretary on Tuesday by the Senate Finance Committee to see if he will face a full Senate vote