February 4, 2025

For the second Monday in a row, the market got rocked to the downside after last week’s Deep seek disaster, yesterday we got nailed by the threat of a punishing trade war, which after initially falling sharply on worries about the President’s tariffs, stocks pared their losses after Mexico said it had negotiated a one-month reprieve.

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The Dow got as low as 665 points at 10:20am, from which it actually had the nerve to get positive by 50 points in the final hour, before getting shoved back down again to end 122 lower. It was hurt by declines in AAPL, CAT, GS, MSFT and NVDA.

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The S&P followed the same pattern with an early loss of 117 before also coming back from those worst levels to end 46 points down to 5995 as it was the same weakness in the former large technology leaders that sold off again, in addition to most banks, homebuilders and liquor companies, also due to the tariff situation.

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The Nasdaq was able to turn an early 486 point loss into a final close of down 235 to 19,391, also due to most of the lower large tech are once again while the Russell 2000 Index of small stocks was weak all day on selling in financials.

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The VIX also ended higher at 18.62 which was lower than its worst level of 20.42 on the morning collapse in stocks as mentioned above.

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The fear hanging over the market is that the President’s tariffs could push up prices for groceries, electronics and all kinds of other bills for U.S. households, adding upward pressure on a U.S. inflation rate that has largely been slowing since its peak three summers ago. Stubbornly high or accelerating inflation could keep the Federal Reserve from cutting interest rates, which it began doing in September to give the economy a boost. And profits for U.S. companies, meanwhile, could face downward pressure from slowing global trade.

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But U.S. stocks pared their losses after Mexican President Claudia Sheinbaum said tariffs on her country’s good are on hold for a month following a conversation with Trump. After the U.S. stock market closed for the day, Canadian Prime Minister Justin Trudeau said a conversation he had with Trump also led to a 30-day pause.

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Much of Wall Street had been hoping Trump’s talk of tariffs through the presidential campaign was just that, talk, and an opening point for negotiations with U.S. trading partners instead of a permanent policy. Monday’s swivels on Mexico and Canada leave open the question of whether Trump is using tariffs as merely a tool for negotiations.

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But when traders came into Monday morning thinking that tariffs were imminent, fear rose quickly about the potential for an escalating trade war that could damage economies worldwide, including the United States.

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Crude oil prices swung Monday amid the uncertainty. The price for a barrel of benchmark U.S. crude went from $72.53 on Friday to nearly $75 before the U.S. stock market opened Monday to briefly falling back toward $72.

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Trump himself warned Americans they may feel “some pain” from the tariffs, which he said would be “worth the price” to make America great again. He also said Sunday night that import taxes will “definitely happen” with the European Union and possibly with the United Kingdom as well.

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Some on Wall Street remain skeptical about how long a trade war may last, especially considering how much attention Trump pays to the stock market. An escalating trade war can send stocks skidding, as Monday morning quickly demonstrated, and significant stock market volatility could lead to a change in approach.

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CEG, the company that sells Modelo and Corona beers in the United States, as did BBY and BF, the company behind Jack Daniel’s that sells alcohol in Canada.

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Instead of stocks and crypto, whose prices also fell in the tumult, investors moved instead into longer-term U.S. government bonds, which are seen as some of the safest possible investments. The resulting rally in their prices drove Treasury yields down.

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The yield on the 10-year Treasury edged down to 4.53% from 4.55% late Friday after earlier dropping as low as 4.46%.

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It is a reprieve, at least temporarily, from a rise in longer-term Treasury yields that had shaken Wall Street in recent months. Yields had climbed in part on worries about the possibility of higher interest rates because of stubbornly high inflation.

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Short-term Treasury yields rose Monday as expectations waned for cuts to rates from the Fed. The yield on the two-year Treasury rose to 4.25% from 4.21%.

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Such AI superstars like NVDA had already come under pressure last week after a Chinese upstart, called Deep seek, said it had developed a large language model that could perform as well as big U.S. rivals, but without having to use the most expensive, top-flight chips.

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This week the 4Q earnings parade continues with the following lineup: yesterday - TSN higher; today – PLTR, NXPI, PFE higher and CLX, FN, PYPL, PEP lower plus Dow component MRK;  AMGN, plus AMD, GOOG, KKR, SPOT; Wednesday – ARM, BSX, MSTR, NYT and Dow component DIS; Thursday – Dow components AMZN and HON plus BMY, FTNT, LLY, RL, SKX, HSY.

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Economic reports will see: yesterday – December construction spending rose by 0.5%, December ISM manufacturing index rose to 50.9 which was the first gain in 26 months; today – December factory orders; Wednesday – December trade deficit; Thursday – weekly jobless claims; Friday – January nonfarm payrolls which are estimated at 165K and the unemployment rate of 4.1%.