HOW I SEE IT – by Bruce
January Sign/Small Cap Renaissance/Less Turbulent
Equity markets/indices up this week- ATHs- even with AI disruptors like DeepSeek. January - positive equity month- obviously, a good sign for the year.
Positives: AAII investor sentiment survey - 41% bullish/ 25% neutral/ 34% bearish- while we’re not in bargain buying range we’re also not in euphoric range.
RBC Global Insight – “Is 2025 the beginning of a Small Cap Renaissance. After years of small cap under performance relative to large cap counterparts the tide looks to be turning. The dynamic of large cap versus small cap cumulative returns over recent years into the yawning gap. Why? Election risk fading in US, more M&A friendly regulators set in place, Easier fed policy to reignite corporate risk-taking and record cash towards being put to use (Canada should follow).
RBC Economics – “Bottom line - Message from businesses that participated in the Q4 Bank of Canada quarterly outlook survey were a healthy mix of a thawing in the weak demand conditions as interest rates drop, and broadly slowing inflation pressures. Much of the pickup in sales outlooks is welcome. Thanks to easing monetary policy since June businesses reported cautious optimism in their demand outlooks and investment intentions over the next year, although tariff risks were emerging to offset. Most optimistic was oil & gas sector.”
Stock trader’s Almanac – “Presidential Cycle- year one best since 1985 bullish for 2025.
Charts. For the first time in history, interest rates rose by 100 basis points while the Fed cut by 100 basis points. Now the market sees less rate cuts. The Fed will pause, and President Trump is demanding cut immediately. Who will win?”
Blackrock Investment Institute – “We stay overweight US stocks for now and corporate earning strength is likely to broaden to sectors beyond tech. A strong start to Q1 for earning season.”
Ed Pennock – “We do not need to be in a hurry to adjust our policy stance. Obviously, Jay Powell hasn’t learned from his experience with Trump in 2018. The rest of the world is cutting rates.”
Jim Paulsen – “Animal spirit stocks remain Wimpy. Typically, before any meaningful drop in the overall S&P 500 index animal spirits make themselves known within the stock market -currently though animal spirits stocks remain Wimpy. Although recession this year seems unlikely, I suspect the lagged impact of increasingly contractionary economic policies will result in a surprising economic slowdown as the year progresses reigniting recessionary fears.”
Dr. Ed Yardeni - “S&P 500 Transportation Composite has been on the move this year -airline traffic is up to pre-pandemic highs -rail loadings are up. Eurozone stock markets have been performing well and sport much lower valuations than the US stock market- still prefer staying at home investment stance. The current bull market has been driven mostly by valuation expansion- now valuation is historically high - we expect earnings growth to perpetuate the bull market this year – however more valuation expansion could leave the market vulnerable to a meltdown -our target for the S&P 500 is 7000 based on solid rise and earnings with no further valuation expansion. Expect more rate cuts this year than previously expected. Expect inflation down to 2%. Our base case scenario 55% chance remains the roaring 2020s. Baby boomers flush with wealth and spending it.
Tom Lee – “January FOMC and 4mag7 EPS reports likely support buy the dip post DeepSeek, AI panic. January barometer positive =89% win ratio. Cyclicals leading YTD = risk on signal. Inflation tracking softer than consensus. Bottom line- we see 2025 is tracking better than our base case. We remain constructive and now see 2025 as less turbulent than we expected.”
Noah Blankstein – “If the Deep Seek data is real, which is an important caveat, we are likely embarking on accelerated development of AI at the application layer. This is what innovation and disruption are all about.”
Negatives: RBC WM- “Foreigners buying US stocks like there is no tomorrow - previous major purchases took place in 2007 and 2000 before the great financial crisis and the.com bubble burst. Overseas investors piled in the US equities as the S&P 500 outperformed world markets by nearly 4 times - can this momentum continue or is there not much powder left to lift stocks even higher?
Brian Westbury – “We still believe the odds of a recession are higher than most investors think. Monetary policy tightening started back in 2022 and inflation remain above the Federal Reserve’s 2% target which means the Fed will be reluctant to get loose anytime soon. We get a 2.8% an annual real US GDP growth rate for the fourth quarter. As we’ve been saying, not a recession yet, but that doesn’t mean the US economy is out of the woods.”
Investment strategy – “Always solved for the big picture not the problem.” Gyan Nagpal
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