January proved to be a busy and volatile month for capital markets. We had the Trump Presidency officially begin, interest rate cuts, and an AI challenger enter the ring to shake up the space.
The Bank of Canada cut its interest rate by another 0.25% bringing the target rate to 3%. This coincided with the last reported inflation rate coming in at 1.8% (below the long-term target of 2%). The lowering of interest rates can have a positive effect on the Canadian economy as interest owed on consumer and business debt comes down; this can free up cash to be spent elsewhere. Lower rates also make taking on new debt more appealing. However, on the flip side, lower interest rates are also a drag on our Canadian dollar compared to USD, so unfortunately that trip to Disneyland may get more expensive. In the US, the Federal Reserve kept interest rates steady at a 4.25%-4.5% range. The last inflation reading in the US was 2.9%, and the Federal Reserve’s Chair Jerome Powell stated that they paused rate cuts to wait and see further progress on inflation.
Market historians have begun calling January 27th, 2025 “DeepSeek Day.” This was the day that Nvidia fell 17% and lost $593 billion in market value, which set a record one-day loss by a company on Wall Street. The tech-heavy Nasdaq index fell 3.1% on the 27th as money rushed out of not only Nvidia, but almost any company heavily invested in AI (Broadcom lost 17.4% and Alphabet fell 4.2%).
Chinese company DeepSeek is the new AI company on the block. Within days of launching its opensource AI, it was the top app on the AppStore. DeepSeek claims that it created its AI model for roughly $6 million, compared to billions of dollars spent by US companies such as OpenAI. When a company shows up with a product that can be produced cheaper than anything else on the market, the old guard tends to panic, and that is essentially what happened on January 27th.
For an excellent summary on DeepSeek, I recommend watching the following video by Bloomberg: https://www.youtube.com/watch?v=zw-XrTmuirg
Last but not least, let’s talk about tariffs. As we all know, the current Trump administration has thrown the global economy into a constant guessing game of “Who’s going to get tariffed next?” As of this writing, the US implemented an additional 10% tariff on all Chinese imports, and China imposed tariffs of 15% on US coal and liquefied natural gas, and 10% on crude oil, farm equipment, and some autos (according to cbc.ca).
This all came after Trump threatened 25% tariffs on imports from Canada (10% on energy being the exception) and Mexico, which were then paused for 30 days at the last minute after Canada and Mexico agreed to shore up their borders. Fingers crossed that the tariff pause turns into a solidified deal of no tariffs (but I’m not holding my breath) because tariffs can have an inflationary effect on the economy.
Using the 10% tariff on China as an example, this means the US importer of Chinese goods must pay an extra 10% tariff. This increases the cost of the item, which lowers the profit of the importing company, so the importing company must increase the price the US consumer pays in order to cover the 10% tariff they paid and sent to the US government. At the end of the day, it is individual consumers that pay the tariff price.
There is the thought that import tariffs will spur consumers to buy products made in their country and kickstart job creation. But as the following video from the Wall Street Journal shows, this can come at a price to the consumer as well: https://www.youtube.com/watch?v=_-eHOSq3oqI&t=2s
So, what does this mean for your investment portfolios? With the news rapidly changing, the worst thing to do is follow a knee-jerk reaction because the news could shift shortly after (look at the now delayed Canada tariff). Instead, it is best to remain globally diversified across geographies and asset classes.
When free trade was on the table, you could have more indirect investment exposure to other nations even if all your investments were domiciled in the US. But as protectionism becomes more in-vogue, investors need to ensure parts of their portfolios are directly invested globally to properly diversify their potential investment opportunity and lower risk over time.
