HOW I SEE IT – by Bruce
January correction? /Bull still young/2 puts make a right
Equity indices correct more this week and down since the start of the year- we approach mid-month, option expiry, will volatility pick up - likely.
Lots of economic and stock forecasts coming for 2025- most positive -is this worrisome? I spent last few days attending RBC DS Portfolio Management Conference- will share ideas over the next few weeks.
Positives:
AAII Investment Sentiment Survey - 34.7% bullish/ 28% neutral/ 37.4% bearish - bullish reading continues to slide since the high of mid-October when markets hit all-time high - getting close to bargain buying opportunities. Best buy ratio is when bullish reading 20%.
RBC Global Insight - “In 2025, global equity market has a potential to add to the strong gains of the past two years. Pro-growth tax and regulatory policies of the incoming Trump administration. RBC CM - anticipates mid-single digit gains for the S&P 500 in 2025. We recommend an approach that is watchful, cautious but invested.”
RBC WM Jim Allworth - “The S&P 500 minus those very strong performing stocks is trading at an easier to justify P/E multiple in the mid to high teens. We continue to monitor market breath closely. So far so good. “New Year Scorecard” - non-financial corporate cash flows are expansionary - unemployment claims and ISM new orders minus inventories are neutral - Yield curve, unemployment rate, conference board leading economic index and Fed funds rate versus nominal GDP growth are recessionary. Only the US is in expansion mode.
Institute for Supply Management ISM services index accelerated to the end of 2024.”
US Commercial Bank Outlook – “Recessionary fears from Fed tightening weight heavily on bank stocks in late 1994 but stocks rebounded 1995 with economic soft landing in 1995. 2024 is a repeat. Following very strong performance in 1995 bank stocks has another strong year in 1996 - again expect a repeat. High propensity business applications growth was very strong under Trump 1.0 will it repeat under Trump 2.0. Job openings and quits have declined from record levels but are still above historic levels. US unemployment weekly claims - 4 week moving average- remains near multi decade lows. Consumer spending still healthy and slightly above the long-term average. Household net worth at record highs. Household debt service payments bounced off record low, but still historically very low. Private residential investment as a percentage of GDP negatively impacts of the rise in interest rates. Commercial construction lending indicator very positive. Purchasers' Managers Index expected to pick up. Regulatory outlook very positive. Average loan growth to accelerate. Normalized credit losses. Interest rate cuts and stability. M&A to pick up.”
Jim Paulsen – “By post war historical standards the contemporary bull market is still quite young and odds favor that it may have considerable time to grow older. Historically, the third year of a bull market is not one of the best. However, still positive. The good news is if the bull survives this coming year, it will likely last several more years. The investor should remain bullish but prepare for the likelihood of a lighter overall returns this year and probably a bumper ride. Bond yields are out of whack - this yield disconnect probably makes an economic slowdown and the re-emergence of recession fears more likely at some point this year. And if recession fears do spike again, expect bond yields to surprisingly decline much more than most currently anticipate.
Dr. Ed Yardeni – “We have a conviction in the labor markets continued health. Payroll employment at another record high. Labor market participation high. High rates of immigration have supported GDP growth. We expect a productivity boom to continue playing a big role in our roaring 2020s scenario. What can go right in the stock market this year including better than expected earnings. Technological advances and a strong economy bouyed by consumer spending.”
Tom Lee presented at our conference – “Two puts make a right. After 20% back-to-back we expect midyear S&P 7000 year and 6600 YE. A Fed put as inflation eases, and the Fed focusses on supporting unemployment. productivity improving. PE expanding towards 26 times.
Many bearish- this is not a bear market. First 5 days of January a gain , good indicator for rest of year.
Negatives:
BCA Research – “Trump’s policies will not be as positive as investors hope. The rest of the world is cheaper but riskier and purging on recession. US real estate market is in very bad shape. Manufacturing is mired in recession. China economy is also in a bad state. The US good news is already priced in. Government bonds are the best hedge. “
S&P 500 posted the worst year and in 72 years. It fell 3%.”
RBC CM – “The risk to our bullish outlook on bank stocks is a re-emergence of inflation which likely lead to a pivot and Federal Reserve monetary policy, which would be a negative for bank stocks.
Geopolitics will dominate headlines but won’t determine macro or market outcomes in 2025.
Capital Economics – “Tariffs won’t cause a slump in global trade but will be mildly stagflation. Widespread use of tariffs - 60% tariff of China and 10% universal tariff now in our baseline. Immigration clampdown -net immigration to grinding to a halt. Deregulation push - but unlikely to have a major impact on the supply side of the US economy. Fiscal concerns will continue to build, preventing additional stimulus.
Good US employment numbers- rates higher for longer. (Economy can still do well with these higher rates.)
Trump election equity rally now gone. Worrisome.
Brian Wesbury - “We still believe the US must pay a price for the bad policies of the past five years. And we think 2025 is the year it pays. Unless Trump policies lift productivity, growth, and profits immediately while reducing inflation, stock market does not have nearly the same upside that it did in the early 1980s- under Reagan.”
Investment strategy – “Investments should be based on not on optimism, but arithmetic.” Benjamin Graham
Bruce
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