By John Stewart, chief investment officer at Farmers Trust Co.
Week in Review: Tech Bomb
A metaphorical bomb was dropped last weekend in the technology world that called into question many of the market’s previous assumptions about AI and how it works.
A Chinese startup company called DeepSeek seems to have built a generative AI model that runs nearly 100 times more efficiently than existing models.
If the news is in fact legitimate, it may mean the need for far less chips, less expensive chips, and far less energy than previously thought.
The king of AI processing chips, NVIDIA, fell nearly 20% in value this past Monday before bouncing back modestly throughout the week. Some of the high-flying power generation companies that had been soaring in anticipation of massive power demand growth were hit even harder on the news.
Nevertheless, this wasn’t all bad news, even for the Tech sector. USERS of AI, like Meta Platforms (that’s what Facebook now calls itself) were actually higher on the news.
Most other non-Tech companies rallied as well. Why? It AI becomes cheaper for everyone, that’s higher productivity at lower cost – in other words – far higher profits for the rest of the economy.
Week in Review: Volatility is Opportunity
Many investors get nervous when the markets become more volatile, as they seem to be into the first few weeks of the new year.
There are opportunities to use volatility to your advantage, however, through the options market.
For example, you can sell an option that obligates you to buy a stock or market index like the S&P 500 if it falls to a certain price level. In essence, you get paid to wait to buy something when it’s on sale – and the more volatile the market is, the more you get paid.
On the flip side, you can sell an option that would obligate you to sell a stock you already own if it rises to a higher price. Again, getting paid to wait, but this time to sell something you own at an even higher price level.
Bottom line, you’re putting in place a mechanism to buy low, and sell high, while getting paid on both sides of the transaction while you let the market volatility work FOR you.
Looking Ahead: Government Policy Rubber Meets the Road
Investors have spent the past few months trying to handicap what the new Trump administration is going to mean for government policy and the markets.
There’s certainly an underlying optimism that the administration will be pro-growth and pro-business, but there’s also a lot of uncertainty surrounding the details of exactly what policies will be enacted.
As we move past the initial stages of cabinet confirmations and executive orders, Congress will begin to take center stage in the coming weeks to debate the particulars of the Trump agenda.
The most important part of that debate will likely be around tax policy and the extension of the 2017 Tax Cuts and Jobs Act from Trump’s first term.
The sausage making may get a bit ugly given the razor thin margin that Republicans have in the house, and that could cause more market volatility as we move throughout the year – but as you now know – volatility is opportunity.