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The Ironwood Recap – Market Update – January 29, 2025

The markets have continued to be relatively positive except for the this week with the new challenge from a Chinese AI startup.  We continue to focus on the Fed and their actions as what we expect to be one of the primary drivers of the stock market in 2025.  The Fed just concluded their January meeting and unsurprisingly left rates unchanged.  This follows a full point of reduction in interest rates in the last three meetings of 2024.  We are still hoping for 2 more rate cuts in 2025, however we need the economy to slow further to justify those cuts.  Inflation is still hovering around 3%, higher than the “target” of 2% that the Fed keeps mentioning.  That is significantly down from its high and not currently a big worry.  Additionally job openings moved slightly in the wrong direction with both October and November having increases in the number of available jobs.  We are currently sitting at around a million more than before the pandemic, so we have also made significant headway in that department.  I would expect job openings to start falling again in the coming months, which would make further interest rate cuts more warranted.

The other big news is the Chinese company DeepSeek.  They are claiming to be able to do AI with far less computing and power costs.  If this is true and scalable, they could change the AI landscape significantly.  AI has been the favored trade over the last couple of years as mega tech companies have poured billions into AI research and infrastructure.  So far, the market has been assuming Nvidia will be the biggest player in that market and this could lessen their dominance.  You will notice a lot of “assumed and coulds” in these statements.  AI is a newer industry and we’re still not sure how it will be monetized and who will in fact come out on top.  So the big run up in some of these stocks has really just been a big gamble.  Right now, DeepSeek claims to be able to do it cheaper.  I would liken that to any industry or series of developments.  Cars used to use more gas per mile and miles per gallon have increased with technological advances.  Big televisions used to cost thousands if not tens of thousands.  Now you can get a huge one for around one thousand.  So too will the AI industry advance.  There will likely be another company that comes out with a method or algorithm that is better than anything we have yet seen.  They also have to be able to figure out how they will make money on its use.

For now, our outlook hasn’t changed.  We are continuing to be a bit more on the aggressive side as we are still expecting interest rates to fall over the next couple of years.  That should give the market a tailwind albeit less strong of one than we have seen over the last couple of years.  Overall PE ratios are still reasonable if you take out the mega tech stocks and a few viral ones so we expect the market to slowly climb.

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