Bi-MONTHLY MARKET ANALYSIS &

ECONOMIC UPDATES

February 13, 2025

Seeking Deep DeepSeek Perspective

One of the biggest stories since the launch of OpenAI ChatGPT came out two Monday’s ago. Stock market shockwaves were caused by DeepSeek, a Chinese AI startup. The Chinese company released of a new, highly cost-efficient AI model. The DeepSeed story underscores just how critical the technology has become — not just for Wall Street and Silicon Valley, but for America’s national security and global competitiveness. And it shows the artificial intelligence revolution is moving at lightning speed. AI is now a matter of national security – more on that thought below. The immediate impact of the January 27 DeepSeek news wiped away hundreds of billions of dollars of market value among leading U.S. AI infrastructure and technology companies. Nvdidia, the dominant player in AI chip design, saw its stock price swing wildly. The tech giant lost an astonishing $590 billion in market value as the DeepSeek story hit the market. The next day it had a rebound of $260 billion, only to drop again by $130 billion on day three of the volatile week in which the company’s stock plunged 15.8%, its worst weekly showing since September 2022. For perspective on how enormous the market cap decline for Nvidia was on its initial reaction to DeepSeek, the $590 billion was equal to the entire value of Costco and Boeing combined. Why the extreme volatility? Claims were that DeepSeek’s AI model was built at a fraction of the cost of leading U.S. models. The Chinese company said that it cost only $5.6 million. This signals the potential for a new price war in AI. OpenAI’s ChatGPT and Meta’s Llama models have run on expensive high-end semiconductors made by Nvidia.  For many investors, this raises at least two big questions: Are NVIDIA’s high-priced AI chips at risk of being undercut? Will AI’s profit margins shrink as efficiency increases? This is suddenly the great debate on Wall Street relative to AI investments. There are still more questions than answers. Perhaps more important, there is now the question of will America lose its leadership in AI and keep its edge in technological warfare and cybersecurity?

DeepSeek’s breakthrough isn’t just a financial story — it’s a national security issue. Supporting AI development, including the data centers that power it, is no longer just about business – it’s a matter of strategic importance. That may be in part why Trump announced the launch of Stargate, a $500 billion joint AI venture.  The newly announced Stargate intends to invest $100 billion immediately into AI infrastructure in the U.S. This live broadcast unveiling of Stargate from the Whitehouse was just days before China made DeepSeek available to America over a weekend on Apple’s App Store where it became the #1 downloaded app, surpassing OpenAI’s Chat GPT. Was that release date a coincidence? Whatever it was, it was flawed as the insatiable demand for the app made DeepSeek a victim of a massive cyberattack causing it to shutdown. In general, its motives are being questioned and raising great concerns. Already a Wall Street Journal report shows in testing the Chinese app that it is more likely than other AI’s to give instructions to do dangerous things. The Journal identified a DeepSeek social-media campaign to promote cutting and self-harm among teens. DeepSeek’s impressive technically aside, it’s raised serious red flags. For myriad reasons, U.S. military service members have been warned not to use DeepSeek AI tools due to potential security risks. Just this Monday New York state banned the use of DeepSeek on government devices, citing concerns over data privacy. Texas was the first U.S. state to ban DeepSeek on government devices. Previously, Australia and Italy banned DeepSeek’s use on official devices. While the U.S. has yet to formally block DeepSeek, the Navy and NASA have. The ability to train AI models more efficiently could shift the balance of power in how wars are fought, how intelligence is gathered and how cybersecurity threats are handled. This underscores why DeepSeek is a national security issue.

With the U.S. making AI a national priority, we’re seeing an unprecedented wave of investment into the technology sector. American tech giants are doubling down on AI investments. No doubt big tech’s AI arms race is heating up. Meta (previously known as Facebook) has called 2025 a “defining year for AI.” The company is planning to invest $60–$65 billion in AI infrastructure alone. Google recently announced a $75 billion budget spend for AI. Add in $80 billion AI spending by Microsoft and $100 billion by Amazon, and that’s $320 billion pledged spending on AI this year by just 4 companies. Reports show that the U.S. leads the world in AI monetization, accounting for 45% of global revenue, while China lags at just 2%. China wants more.

Proper Perspective:  In our hectic and often hard to comprehend world, it is very easy to lose perspective. You may agree it is sometimes difficult to see the big picture. The media often doesn’t help with this, but unfortunately instead encourages us to see things in a most negative light. Here is hopefully a pause to gain positive perspective.

~~H. K. Mencken, 1923

What Happened On this Day February 13, 1795- The first state university in U.S. opens, University of North Carolina.

INDICATORS OF INTEREST:

• Market’s Current Signal: Market in Confirmed Uptrend.  Analysis of the stock market over 130 years of history shows we can view it in terms of three stages – market in uptrend, uptrend under pressure and market correction.  Since the 1880’s, this perspective has led to investment out-performance relative to market indexes. This is due to trend analysis which determines risk reducing, return enhancing market entry and exit points. The U.S. stock market’s current signal strengthened again on January 17th to Market in Confirmed Uptrend.

The Stock Market Trend: Market in Confirmed Uptrend. Minus a Santa Rally, the U.S. stock market is off to a good start in 2025, though December’s weakness triggered a change in the market’s trend. That cautionary view was a function of mounting distribution days since mid-December. Many of those of since fallen off and market action mid-January has been more bullish. Most of the AI stocks that got hammered by the news report about China’s DeepSeek have rebounded. So far this year, stock market resiliency has kept the confirmed uptrend intact.

Recapping Last Week

U.S. equities recovered most of Monday’s sharp selloff triggered by tariff announcements; however, the week ended on a down note after solid labor market data and an unexpected leap in U.S. inflation expectations. The S&P500, Nasdaq Composite, and Russell 2000 indices all fell marginally. Risk assets plunged to begin the week after the White House announced sweeping tariffs for Canada, Mexico, and China. Not long into the U.S. trading session, President Trump agreed to a 30-day pause for levies on Canadian and Mexican imports, which helped stabilize markets. However, China retaliated with tariffs on American imports and imposed exports controls on more key industrial elements. Eight of eleven S&P500 sectors gained ground, with technology rising nearly 1% despite subpar earnings reports from Alphabet and Amazon. Crude oil prices tumbled 4% after OPEC+ agreed to keep its policy intact of gradually increasing output, starting in April. A potential U.S.-China trade war also weighed on sentiment. Gold futures jumped 2% to a fresh record high and are nearing $3,000 per ounce. U.S. Treasury yields were lower for the week but spiked higher on Friday after the non-farm payrolls and consumer sentiment reports produced discouraging inflation news. Job creation was below expectations in January at 143k, but the prior two months were revised higher. Wage growth ticked up to 4.1% from 3.9% YoY, while the unemployment rate inched lower to 4%. Employers slashed jobs at the lowest rate in three years, according to the Challenger report. U.S. consumer sentiment for early February slumped to a seven-month low, with one-year inflation expectations shockingly surging to 4.3%—a full percentage point higher than the prior reading. The five-year inflation outlook rose to 3.3%, the highest reading since June 2008, as households feared the negative effects of tariffs. Other economic data signaled warning signs for price pressures as well. Non-farm productivity for Q4 2024 slipped to 1.2% from 2.3% as unit labor costs and hourly wages jumped. U.S. ISM manufacturing PMI moved into expansion territory at 50.9 last month for the first time in over two years, accompanied by a rise in the prices paid component. ISM services PMI slipped, but its prices index remained above 60 for a second straight month.

In international markets, the Bank of England cut interest rates by a quarter point to 4.5%. All nine members supported the reduction, but two surprisingly sought a larger reduction to 4.25%. The BoE cut its 2025 growth outlook in half but said it would proceed carefully with further policy moves, given an expected inflation spike and global economic uncertainty. Eurozone inflation accelerated to 2.5% YoY in January as energy costs rose. Germany’s factory orders jumped in December while industrial production declined, highlighting the mixed signals for the country’s beleaguered economy. Last of all, China’s Caixin PMI indices—which survey smaller, export-oriented companies—showed improvement in manufacturing while services missed forecasts. Investors will have to wait until the next reading to see if the recent Lunar New Year holiday spurred domestic demand.

Current View

The current bull market continues to flex its strength with its resiliency. Yesterday is a another example in addition to similar bullish market action so far this year. Amid yesterday’s bullish reversal, the Nasdaq closed slightly above its 50-day moving average after spending most of the session below it. In another positive sign for growth leaders, the IBD 50 growth stock index outperformed with a 1.1% increase. The positive reversal is all the more impressive, considering that the yield on the benchmark U.S. 10-year government note spiked 10 basis points to 4.63%. At one point, the 10-year note yielded 4.66%. Meanwhile, bond traders are not seeing any real chance of a trim in the fed funds rate (currently at a target range of 4.25%-4.5%) until the September meeting.

• Industry Group Strength:  BULLISH. As of yesterday, 144 out the 197 groups I monitor are up year-to-date. 53 groups are down for the year.
• New Highs vs. New Lows:  BULLISH. In yesterday’s session, there were 109 new 52-week highs and 79 new 52-week lows.
• Dow Dividend Yield:  BEARISH. The current yield for the Dow Jones Industrial Average is 1.68%. The 10-year Treasury now 4.54%.
• Volatility Index: NEUTRAL. Volatility has been volatile. The “VIX” is now 16, the same as two weeks ago. The index is also known as the “Fear Index.” It is considered a contrarian indicator and therefore viewed as bullish as it rises indicating investors are becoming more fearful. The VIX:

• Fear / Greed Index: NEUTRAL.  Investors are driven by two emotions: fear and greed. Too much fear can create a condition of oversold/ undervalued stock prices. Too much greed can result in overbought/overvalued stock prices. The AAII Investor Sentiment Index is now neutral.   BE FEARFUL WHEN OTHERS ARE GREEDY. At 44, the Fear & Greed Index is down from 47 two weeks ago.

CLICK VIDEO FOR MORE ON THE “FEAR & GREED INDEX”

How CNNMoney’s Fear & Greed Index works

• Bull / Bear Barometer:  NEUTRAL. This secondary market indicator should also be viewed with a contrarian perspective. As of yesterday, according to the latest survey of stock market newsletter writers by Investor’s Intelligence, the bulls is 47.5%. The bears have dropped to 29.5%. The bearish read was 32.2% 2 weeks ago. Consider this a contrarian indicator because the crowd is often wrong at market tops and bottoms. In other words, extreme bullishness has been seen near several market tops in the past, while extreme bearishness has been seen at market bottoms.
• Put / Call Ratio:  BEARISH. The ratio of put-to-call options is 0.57, about the same as 2 weeks ago. The put-call ratio tracks the mood of what options investors are doing, not just saying. They typically buy puts if they think a stock will decline and calls if they think it will rise. If they’re buying lots of puts, they see the market declining. And if they’re loading up on calls, they’re generally bullish. Historically, market bottoms occurred when the reading spikes to 1.2 or more. Market tops are often made when the reading is 0.6 or less. Note how reliable this is with respect to the February record low coinciding with the market high. Keep in mind this is also a contrarian indicator.

Global Economic Indicators & Analysis:

POSITIVE INDICATORS

Jobs Market Up:  Job growth rose by 143,000 in January, a sharp drop from the upwardly revised 307,000 in December and 261,000 in November, the Labor Department said last Friday. Economists had been expecting an overall healthy reading, with 169,000 net new jobs created in the month and the unemployment rate holding steady at 4.1%. The January report, which effectively closes the book on the Biden-era job market, instead showed joblessness falling to 4% as the economy gained 143,000 jobs, with December revisions demanding attention.

Manufacturing Sector Index Up:  ISM manufacturing index climbs to 27-month high of 50.9% before tariff announcement. The index of new orders, a sign of future demand, rose 3.0 points to 55.1, the highest level since the middle of 2022. The production barometer increased 2.6 points to 52.5%. The employment gauge climbed 4.9 points to 50.3%. That’s the first positive reading in eight months. The dispute over tariffs is likely to delay a recovery in manufacturing until the trade dispute is resolved, and there’s no telling how long that will take.

Jobless Claims Up:  Initial jobless claims rose fell by 7,000 to 213,000 in the week ended February 8, the Labor Department said today. Economists polled by The Wall Street Journal had estimated new claims would fall by 4,000 to 215,000. Claims were at 213,000 in the first week of last year. A sturdy consumer is keeping the labor market strong, economists said.

CPI Up:  Consumer prices rose sharply in January, underscoring why the Federal Reserve is in “no hurry,” in the words of its chairman, to cut U.S. interest rates again. The consumer-price index rose a stiff 0.5% in the first month of 2025, the government said yesterday. That’s the biggest increase since the summer of 2023.

Economists polled by The Wall Street Journal had forecast a 0.3% advance. The increase in consumer prices in the past 12 months edged up to 3% from 2.9%, leaving it well short of the Fed’s goal of 2% inflation. The yearly rate had fallen to a post-pandemic low of just 2.4% last fall before reversing course. The so-called core rate of inflation that omits volatile food and energy prices rose 0.4% in January, a tick above expectations. The Fed views the core rate as a better predictor of future inflation. The 12-month increase in the core rate moved up to 3.3% from 3.2%.

PPI Up:  Wholesale prices rose sharply in January in another sign that lingering inflationary pressures in the economy will keep high U.S. interest rates from falling much anytime soon. The producer-price index increased 0.4% last month, the government said today. Economists polled by The Wall Street Journal had forecast a 0.3% gain. The increase in wholesale inflation in the past 12 months rose to 3.5% from 3.3%. That’s the highest rate in almost two years. The core rate of wholesale inflation, which omits volatile food, energy and trade margins, rose 0.3% last month. The 12-month core rate slipped to 3.4% from 3.5%, however. Core inflation rates in the PPI, CPI and the Fed’s preferred PCE price index are seen as better predictors of future trends. The Fed is aiming to reduce inflation more broadly to a low 2% annual rate. The “stronger-than-expected PPI helps to confirm, especially after Wednesday’s hot CPI, that inflation did indeed come roaring back in January, and makes the Federal Reserve’s path much clearer, since there is arguably zero reason to cut interest rates right now.

U.S. Productivity Down: U.S. productivity decelerated to a 1.2% annual growth rate in the fourth quarter from a 2.3% rise in the prior three-month period, the Labor Department said last Thursday. Economists surveyed by the Wall Street Journal had projected a 1.4% increase. For the year, U.S. productivity increased at a 2.3% rate, up from a 1.6% in 2023.

Service Sector Index Down: The large service side of the U.S. economy, in which most people work, cooled off in January — as did inflation — but cold weather at the start of the year had something to do with it. The service index compiled by the Institute for Supply Management last Wednesday slid to 52.8% in January from 54% in December. Most businesses supply services, and more than 80% of Americans workers are employed by those businesses.  The new-orders index dropped 3.1 points to 51.3%. The employment barometer rose 1 point to 52.3%, to mark the highest level since the summer of 2023. The large service side of the economy has powered U.S. growth for the past few years and is primed to do so again in 2025. The threat of Trump tariffs, however, has offset some of the optimism of business leaders about the potential for tax cuts and a reduction in regulations.

John J. Gardner, CFP®, CPM®.

Blackhawk Wealth Advisors, Inc.

3860 Blackhawk Rd. Ste. 160 Danville, CA. 94506

Phone: 888-985-PLAN · Email: jg@blackhawkwealthadvisors.com

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For my Market Monthly podcast, click on the link below. I provide a review of global stock market highlights over past month and preview of the month ahead. Forward insights and perspectives are based on current financial market and economic trends with an emphasis on relevant developments in various areas from Fed policy to company earnings announcements.

Blackhawk Wealth Advisors is the parent corporation of Equity Research & Portfolio Evaluation and Blackhawk Asset Management. It’s Chief Investment Officer is John J. Gardner. John is a Certified Financial Planner (CFP®) and Certified Portfolio Manager (CPM®). As an AIF®, John is also an Accredited Investment Fiduciary.

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