HOW I SEE IT – by Bruce 

Happy Holidays and all the Best for 2025

Mid-Month /upside down or backwards/short lived

Mid-month Madness - options corrections, we have had many - when you have such a strong equity rally corrections occur - we have had 8 small and large corrections this year- including this week’s - will we have more in 2025- yes, will we erase the gains of last 2 years?

Positives:

AAII Investment Sentiment Survey - 40.7% bullish/ 27.9% neutral/ 31.4% bearish- not sure if the bullish reading reflects Wednesdays sell off.

RBC WM – “What caused this week's sell off - was it the Fed cutting rates by 25 basis points but poised to slow 2025 pace. FOMC members revised core PCE inflation and uncertainty estimates upwards. Fed Powell made two statements that caused markets to D-risk. 1. The slower pace of cuts for next year really reflects both the higher inflation readings we’ve had this year, and the expectation inflation will be higher. 2. Some people did take a very preliminary step and start to incorporate highly conditional estimates of economic effects of policies into the forecast at this meeting and said so in the meeting. Some people said they didn’t do so, and some people didn’t say whether did that did or not.” (Tom Lee)

RBC GAM – “The global economy has been resilient in the last few years, despite headwinds from higher interest rates, but with inflation now close again on central bank targets, the backdrop has shifted to one of monetary accommodation which should bolster economic activity. Although Trump’s agenda remains highly uncertain at this point, we know that he favors American eccentric economic growth, less taxes, and more deregulation by combination which could reignite confidence and recharge animal spirits.”

Positive themes – “Central Banks cutting interest rates. On track for soft landing. Data decent economic data recently. More Chinese stimulus ahead. Inflation pressure is easing.”

Pulse of the market – “The tone in our meetings with European investors last week was somewhat cautious, characterized by concerns about elevated sentiment/ positioning and valuation, along with interest in defensive sectors and questions about the policy leanings the new administration in Washington. Things that jumped out on our highly frequency indicators include the resurgence of the mega cap growth trade, the continuation of elevated uncertainty in the FNFIB survey, and a loss of momentum in US equity flows. November and December are usually strong while January, February are often weak. Growth is outperforming value again. US productivity Renaissance- higher productivity has propel the US economy ahead of its major peers in recent years, offering a blueprint for the other countries and raising the stakes in the global race to harness emergent technologies such as AI. This is the first time in history of the data that over 40% of banks were tightening credit standards, and then went back to not tightening without a recession having occurred.”

Jim Paulsen – “Fed policy was upside down or backwards when inflation was surging, it was upside down or backwards as inflation declined, and it now appears upside down or backwards, easing into a solid economy and a frothy bull market. My guess is 2025 will turn out to be another positive year for stock investors with the S&P 500 index rising by about 10% for the full year. But it’s not likely to be a straight line. I think a recession in a bear market are unlikely in 2025. The liquidity is very ample and the private sector balance sheets remain strong. The Main Street pessimism remains to pronounced. While the stock market may suffer a correction without a recession, bear market is unlikely. This backward Fed is easing while other forces are tightening. The Fed may hold private conferences and get considerable coverage, but the tightening forces may still slow economic growth raise recession fears and eventually bring down bond yields much more than most currently anticipate. According to the Main Street Metre (MSM) – “This middle-age stock market should continue surprisingly many by delivering a satisfying 10% average annual total return in the coming five years.”

Dr. Ed Yardeni – “2024 no doubt will be remembered by equity investors as the year that everything AI related outperforms everything not. Dr. Ed -three inflation scenarios, the good, the bad and the ugly. In the good- rising productivity growth, moderate inflation even as it spurs economic growth. That’s the crux of our roaring 2020s economic scenario and is the most likely scenario to play out. The bad is a witch’s brew of possibilities with bearish inflationary consequences. The ugly also involves a geopolitical crisis catapulting oil prices.”

Tom Lee – “This panic reaction will be short-lived. There are four reasons for this. 1. The spot VXX spike 74%, second highest ever spike and 4 worst spikes saw full recovery of stocks within a month 4 of 4 times.

2. Signs of capitulation as today was 90% down day and NYSE TRIN reading reach lowest ever negative intro day -2170. 3. S&P 500 basically tested 50 day moving average where it rallied in 2024. 4. Investors ultimately conclude Fed will still dovish but has less visibility into 2025. What is noticeable of how quickly markets recover from the selloff- 3 of 4 S&P 500 fully recovered within a week.”

 

Negatives: 

RBC GAM – “Variety of risks. Geopolitical tensions have intensified in the Middle East, as well as between Russia and Ukraine. China’s growth remains a concern, especially given its highly indebted economy, and until we get more details from the US administration on policies related to trade immigration fiscal spending, it will be challenging to qualify the potential economic impact.”

Negatives themes - High rates still painful. Still some recession indicators- yield curve and unemployment.

Manufacturing PMIs are struggling.

US job openings- US economy is likely already in or on the brink of a recession. The US stock market strength is masking this reality, but the job data shows the reality of it all.

Corporate executives are now selling their stocks at record levels with the ratio of sellers to buyers hitting six times.

RBC economics- Fall economic statement 2024 – “Deeper deficits. High drama. Policy proposal in doubt. Should you worry about a decline in the Canada population.

Retail investors are buying stocks like never before.

Trump’s tax cuts made failed to drive much of any economic boost. (CRFB).”

Brian Wesbury – “The Feds balance sheet has grown about 7×700% since the start of QE in 2008 and it seems that it has done so was very little oversight from Congress the White House or the press corps.”

Zero day options – the stock market casino on steroids.

Investment strategy – “Using contrary, thinking is investment at its best and will beat any system. On paper it may seem easy but practice it is very difficult and requires considerable nerve.” Jim Slater.

 

Investment strategy – “Using contrary, thinking is investment at its best and will beat any system. On paper it may seem easy but practice it is very difficult and requires considerable nerve.” Jim Slater.

Bruce

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