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Q1 2025 Outlook





January 2025

Issue #5

 

Who wins in a trade war?


THE BIG 3


Tariffs

Game on!

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AI 

DeepSeek has upended conventional wisdom regarding AI.

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Rate Cuts 

The Fed seems to be done with rate cuts for now.

 

Trump’s Tariffs

It’s a whole new world.

The Trump administration has finally pulled the trigger on the first wave of tariffs. The market will react accordingly (volatility). It would not be surprising to see a robust selloff in many sectors. In theory, the administration is playing the long game. Tariffs not only bring other countries to the negotiating table, but they should force many corporations to reshore manufacturing and production. In addition, second and third order repercussions could present as some consumer discretionary inflation, coupled with a potential repricing of real estate and some risk assets. What this does to aggregate inflation remains to be seen, but many low to middle income Americans might finally be able to buy a home.


All of this will come at the expense of short-term price stability. We predict it will not take long for American trade partners to give concessions to reduce the effects of tariffs on their respective economies. We also expect further tariffs to be announced on the EU before the end of Q1.

 

AI

DeepSeek’s rapid development highlights the evolving AI landscape, triggering volatility in AI-related stocks. While some companies may benefit from increased AI investment, others face pressure as competition intensifies. Investors should stay informed and consider both innovation and regulatory factors when navigating AI-related investments. Secondarily, there are significant regulatory and geopolitical concerns. As a Chinese firm, DeepSeek will likely gain access to millions of American devices. Given the nature of AI, DeepSeek has the potential to be significantly more damaging to national security than TikTok. We expect AI to be one of the only sectors to see increased regulations under the Trump Administration.


 

Rate Cuts

The Federal Reserve has decided to pause interest rate cuts, citing persistent inflation concerns and a resilient economy. Despite earlier expectations of rate reductions in 2024, the Fed is adopting a cautious approach to avoid premature easing that could reignite inflationary pressures.


Surprisingly, the Trump administration reacted positively to the most recent Fed policy minutes. It would appear a strong dollar, supported by higher rates, gives the United States additional bargaining power. Moreover, higher rates could help stem some possible inflation brought by the aforementioned tariffs.


The Fed’s decision to halt rate cuts signals a commitment to ensuring inflation is fully under control before adjusting policy. While markets may anticipate cuts later in the year, the central bank remains data-dependent, prioritizing long-term economic stability over short-term market expectations.

 

The Bottom Line

The new administration does not seem terribly concerned with stock market volatility; rather, it appears to be highly focused on getting the federal balance sheet under control. There will undoubtedly be global pushback on new policies, and volatility will seep back into risk assets. Opportunities will present themselves, and policies will change rapidly. Remaining invested will be the key to long-term success as America repositions itself in a globally interconnected economy.


Any opinions are those of Alexander Leonida. The information contained in this document does not purport to be a complete description of the securities, markets, or developments referred to in this material. There is no assurance any of the trends mentioned will continue or forecasts will occur. The information has been obtained from sources considered to be reliable, but CFG does not guarantee that the foregoing material is accurate or complete. This newsletter: (a) is not an official transaction confirmation or account statement; (b) is not an offer, solicitation, or recommendation to transact in any security; and (c) may not be retransmitted to, or used by, any other party. Investment products are: Not deposits. Not FDIC or NCUA insured. Not guaranteed by the financial institution. Subject to risk. May lose value. 

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