Lexicon Financial Group Weekly Update — January 29, 2025

Jan 31

“Three great forces rule the world: stupidity, fear and greed.”

— Albert Einstein

From the desk of Craig Swistun, CIM, MFA-P, Portfolio Manager, Raymond James Investment Counsel, and Wayne Hendry, Client Relationship Manager, Raymond James Investment Counsel

Looking Around

We don’t plan for disruptions. They just happen. And they can happen at any time and to anyone and anything. A recent example of disruption is the Covid pandemic which impacted lives, businesses, and countries. The pandemic disrupted our plans to meet with our clients in-person for more than two years.

The markets experienced a disruption of their own, this week, with the emergence of China’s DeepSeek AI models. This threw the artificial intelligence (AI) sector for a loop. According to DeepSeek, its AI models are on par or better than the industry leading modules that have been developed in the United States (U.S.). And here is the kicker, they are cheaper!

Investors began doubting the reasoning behind some U.S. tech companies' decision to pledge billions of dollars in AI investment. Shares of several big tech players, including Nvidia, were hit.

How quickly we forget. A similar disruption occurred in China by the release of OpenAI's ChatGPT in late 2022. It resulted in a scramble among Chinese tech firms to develop their own chatbots powered by AI. The release of the first Chinese ChatGPT equivalent, made by search engine giant Baidu, was met with widespread disappointment in China at the gap in AI capabilities between U.S. and Chinese firms.

The tables have, for now, been turned as DeepSeek’s models (DeepSeek-V3 and DeepSeek-R1) appear to be cheaper but as good as OpenAI and Meta's most advanced models. Some Silicon Valley executives and U.S. tech company engineers have praised DeepSeek but others have expressed scepticism about DeepSeek's success story and how it got past U.S. export controls that ban such advanced AI chips from being sold to Chinese companies. According to Bernstein Research analysts, DeepSeek's total training costs for its V3 model were unknown but were much higher than the $5.58 million the startup said was used for computing power. They also said the training costs of the equally-acclaimed R1 model were not disclosed. (1)

Several of the big tech players have regained some of the ground they lost but it is this type of event that makes timing the market challenging and reminds us of the importance of diversification in investing. That being said, the technology industry is here to stay – although the leaderboard will certainly change over time.

For most clients, we continue to gain exposure to various industry sectors by investing in exchange-traded funds. If there is an area of the economy that we feel strongly about, we can easily allocate capital to that area without needing to identify which company will emerge as the leader. This level of diversification allows us to participate, without the higher risk associated with having to be exactly right on a single stock. Some will argue that it reduces overall portfolio performance – but that’s only if you are able to reliably pick the winners and have the discipline to hold on when things look bad.

We believe it is often wiser to buy into the sector, rather than a specific stock or stocks, for the risk reduction that it provides to an overall portfolio. (2)

Read and Watch

Want deeper insight into topics in your Weekly Update? Then, read and/or right click:

Evaluating the potential impacts of US tariffs

ECB policymakers line up behind further interest rate cuts

Will China thrive during the Year of the Snake - or will Trump’s tariffs bite?

Raymond James Markets & Investing: Tariff risks are likely overblown, but uncertainty may linger – CIO Larry Adam, January 24 , 2025

Raymond James Economy & Policy: Pay close attention to the Fed Chairman's press conference - Chief Economist Eugenio J. Alemán, January 24, 2025

Looking Back

The Toronto Stock Exchange’s S&P/TSX composite index (TSX) ended last week in positive territory despite concerns around the possibility of tariffs. In terms of sectors, the materials sector rose 0.9 per cent as the price of gold climbed while the consumer discretionary sector was up 0.8 per cent and the technology sector added 0.5 per cent. The energy sector fell 1.1 per cent as the price of oil posted a weekly decline. (3)

Major indexes in the U.S. finished the holiday-shortened week (markets were closed Monday in observance of the Martin Luther King, Jr. holiday) higher. The S&P 500 Index notched a new record high on Thursday before dipping modestly lower on Friday. Growth stocks outperformed value shares during the week for the first time this year. Also, large-cap indexes generally outperformed their smaller-cap peers.

Headlines during the week were largely dominated by political developments in the wake of President Donald Trump’s inauguration. Although President Trump did not impose a new round of tariffs on day one as he said he would, he did call on federal agencies to conduct a review of U.S. trade policies to determine the impact of potential future tariffs. He also pledged to impose 25 per cent tariffs on Canada and Mexico as soon as February and stated that he would “rather not have to use” tariffs on China. This helped fuel optimism for a potential trade deal between the world’s two largest economies. This was generally well received by investors and helped drive positive sentiment early in the week.

Major European stock markets received a lift from President Trump not announcing new tariffs in his first days in office and growing expectations that the European Central Bank (ECB) could continue to cut interest rates.

Japan’s stock markets ended higher last week. The Bank of Japan (BoJ) raised its interest rate for the third time in a year. The 0.25 percentage point increase put the rate at around 0.5 per cent which is its highest level since the 2008 global financial crisis. The latest Japanese consumer inflation data revealed price growth well above the BoJ’s two per cent target, which lent support to further monetary policy normalization by BoJ.

Chinese equity markets rose last week, thanks to news that President Trump may be taking a softer stance on China tariffs. Chinese banks left their one- and five-year loan prime rates unchanged at 3.1 per cent and 3.6 per cent, respectively, for the third straight month. Chinese lenders slashed the benchmark lending rates in October last year by a greater-than-expected 25 basis points to help revive the economy. Analysts anticipate that the Chinese central bank will continue easing monetary policy this year. This includes potentially cutting the reserve requirement ratio and interest rates as the Chinese government steps up efforts to combat the market uncertainty resulting from a second Trump presidency. (4)

The opinions expressed are those of Craig Swistun and not necessarily those of Raymond James Investment Counsel which is a subsidiary of Raymond James Ltd. Statistics and factual data and other information presented are from sources believed to be reliable, but their accuracy cannot be guaranteed. It is furnished on the basis and understanding that Raymond James is to be under no liability whatsoever in respect thereof. It is for information purposes only and is not to be construed as an offer or solicitation for the sale or purchase of securities. Raymond James advisors are not tax advisors, and we recommend that clients seek independent advice from a professional advisor on tax-related matters.