What Will the Market Do vs. What Do You Need it to? 

Five Things You Should Know

1. Equity Markets – were down this week with U.S. stocks (S&P 500) falling –1.92% and international stocks (EAFE) down –0.76%. 
2. Fixed Income Markets – were also down this week with investment grade bonds (AGG) down –0.88% and high yield bonds (JNK) down –0.61%.
3. U.S. Jobs Report – The U.S. economy added a staggering 256,000 jobs in December despite expectations for only 153,000, sending the signal that the economy remains stronger than expected and in turn souring expectations for further imminent cuts to interest rates by the Federal Reserve. As a result, traders are now pricing in just a 25% chance of a rate cut in March compared to 41% a day prior. 
4. U.K. Struggles – Assets are struggling, and yields are rising in the region as they grapple with mounting concern over their deficit and potential tariffs from incoming President Trump. The pound has now hit its lowest level in over a year while the 10-year gilt yield has spiked to 4.92% 
5. Key Insight – [VIDEO & ARTICLE] When any of us want something bad enough it isn’t uncommon that we make decisions, that with some hindsight or objectivity, that prove to be unwise. However, our emotions around such issues often blur our “vision” – this is certainly true for many investors. This week we discuss the dangers, the current market dilemmas, as well as share some reminders that can help address them both.

Insights for Investors

By Tim Mitrovich

What Will the Market Do vs. What Do You Need it to?

Intro 

It is that time of year when market pundits and many managers feel the need, or in some cases may be forced as part of their jobs, to make a call on what the year ahead will bring for markets. They are notoriously poor at doing it, but that doesn’t seem to slow down the annual tradition. 

Do market outlooks have any value? I believe they do, not because they are useful to time markets or position portfolios, but rather because done right they can position a range of higher probability outcomes to help prepare people for what may lie ahead – both good and bad.  

The value of proper outlooks can be two-fold a) to hopefully reduce surprises and corresponding emotionally based decisions and b) to make sure you are prepared and positioned for a variety of possible outcomes.  

This week’s commentary will address both of these aspects, but we’ll begin by tackling the importance of preparation for a variety of outcomes and not confusing what you hope or want the market to do with what is most likely to occur. We’ll then take a look at the current landscape including some thoughts from some commentators we greatly respect. 

What you want vs What will happen  

As I enter my 30^th year being in and/or around the investment industry I have seen one common, and very dangerous, mistake time and time again. Namely, investors often confusing their intention or hopes, with the likelihood that the market will cooperate (especially over an arbitrary timeframe). 

This is commonly referred to as the “gamblers fallacy” which manifests in investing both as clients’ using past performance to guide their portfolio and/or an increase in their conviction of their holdings and what they’ll do after their purchase (i.e. many studies have shown gamblers belief in their bets paying out increase once made). 

This all seems silly to most, until it’s your money, your story and your emotions – and then the temptation is there for just about everyone. 

The reality is usually something quite different, thus the old market adage that “the market will do whatever will hurt the most people.” 

Key to this is usually timeframes. It’s not that most quality investments, especially well diversified ones, haven’t historically made money over time it’s that people want/expect a certain return over a specific timeframe. 

I can recall a prospect in late 2021 who came in to discuss retirement planning. He had a strong desire to retire at the end of 2022 and yet had all of his positions in tech stocks. We strongly encouraged him to bank some of his recent gains off the COVID lows, diversify, and lock in some income streams that could support his retirement. 

His response was that of one falling prey to the “gambler’s mindset” above. He stated that based on 2020 and 2021 he “expected” the market to give him another 20% return and then he would consider rebalancing. 

So, what happened? As you likely know, the NASDAQ proceeded to drop 30% during 2022 from its Q4 of 2021 high, the investor panicked as his “plan” fell apart and he sold many of his holdings and as a consequence is still working to “fix” what was already in place over two years ago. 

Sad, but not uncommon and totally unnecessary. 

Any good plan needs to be able to meet one’s needs, not necessarily wants/desires, regardless of what markets may bring. An investor’s needs of course differ in many ways from timelines, liquidity, income etc.  

But for most, especially those near or in retirement, making sure to have proper cash flow and some non-correlated assets (e.g. meaning something within their portfolio should be doing ok regardless of market conditions in case of emergency needs) is key. 

The good news is that you don’t need to predict markets, nor do you usually need to take on a number of risky assets/allocations to successfully reach financial independence. The “bad” news is that reaching that goal isn’t without its challenges namely patience, discipline and proper perspective. 

So, what might investors encounter is 2025? Let’s see what some thoughtful analysts and managers have to say. 

The Year Ahead  

By no means the only criteria, but certainly one of the first and most important in my opinion, is tuning out those “commentators” that are prone to make “big calls” or pretend to know with any certainty what will happen in the future. However, “knowing what will happen” and “understanding the range what is possible/probable” are two different things even though they can appear similar at times. 
 

One of our favorite economists/commentators is Brian Wesbury the Chief Economist at First Trust who has been recognized for his forecasting. His outlook for 2025 is fairly somber, we’ll share the full outlook next week, but the key summary points are his belief in the realities that “The US has run nearly $2 trillion budget deficits in each of the past two years, half of all job growth in the past two years has been in government and healthcare jobs, growth in the money supply is trending higher. At the same time, the new Trump Administration wants to cut spending by up to $2 trillion (over how many years we have no idea), push for an extension of the 2017 tax cuts, and possibly cut other tax rates as well” coupled with his expectation that “CPI will be up in the 2.5 – 3.0% range this year.  And what this means is that the 10-year Treasury yield, which may find a bid as growth slows, will have a hard time falling below 4%. And when we put that into our Capitalized Profits Model, it says that stocks are overvalued by about 20% right now.  Will stocks fall that much?  Probably not because the market seems euphoric over the impact of AI, new satellite networks, and even Ozempic.  But another year of 20%+ gains in stocks does not seem to be in the cards.  We expect the S&P 500 to end 2025 between 5000-5400…let’s say 5200.” 
 

The team at Strategas also signals some caution, albeit with a bit more constructive outlook for markets, noting “By our lights, the chances of a recession in 2025 are quite low given the strength in corporate profits, strong labor markets, and tight credit spreads.  Still, considering the fact that the S&P is trading at almost 22x forward earnings, the VIX at 17, and Bitcoin at $96,000, it is safe to assume that expectations for risk assets remain high.  With the largest 10 stocks in the Index comprising nearly 39% of the S&P 500, a good portion of outperformance for the active managers this year will be driven by determining how long the A.I. trade will continue to outperform.  There are times, of course, when great companies can be bad stocks.  We are betting on the A.I. trade to continue, but our head is on a swivel.” 

Perhaps the team at Gavekal summarized the dilemma facing investors best stating that while “Market valuations are looking stretched and behavior feels frothy, at least in the US. Simultaneously, the backdrop seems favorable for risk assets, with easier fiscal and monetary policies in the major economic areas, including the US, China and eurozone, even as uncertainty abounds on important issues, most notably US trade policy.” 

Echoing the sentiments around what appears to be a still strong U.S. Economy came these comments from the team at TrendMacro who stated “We’re in what amounts to a post-war boom, a productivity-led expansion in the wake of an historically unique high-speed depression experienced during the pandemic. The advent of consumer 2025 accessible artificial intelligence is an accelerant to what was already a most growth-favorable backdrop. We have stood against a relentless recession narrative for almost three years, ever since the yield curve inverted and gave a terribly false signal, and we’re still there. A surge in small business confidence following Donald J. Trump’s decisive election will support continued expansion at the grass roots of “animal spirits” (see “The Trump Effect” December 11, 2024). We don’t think possible tariffs from the Trump administration will make any difference one way or the other (see “Predictions for 2025: Tariffs” January 3, 2025). There’s no reason to expect a recession until there’s a reason to expect a recession, and right now there isn’t one.” 

One noteworthy and nuanced “prediction” that we feel summarizes our thoughts at this time as well, came from Ben Snider, equity strategist at Goldman Sachs who, as reported by Bloomberg, noted that while Goldman Sachs projection is for just a 3% average annualized return over the next decade for the S&P 500 (note the last decade’s average has been 13%) that outlook is not as bearish as it seems. He stated, “We remain very confident in the long-term outlook for US economic growth,” Snider said in an interview on Tuesday. “We remain very confident in the outlook for long-term corporate profit growth. We feel good about the long-term outlook for the average [S&P 500] stock. The concern that we have is that concentration is extremely high … And when we put that in our models, it points to low average returns.” The key here, and one we’ve emphasized a number of times of late (see October 18, 2024 on valuations/future returns and December 6^th 2024 looking at valuation of Top 10 S&P500 positions) is that valuations matter to future returns and thus blindly buying indices that have become not only concentrated but concentrated in positions trading at incredibly high valuation is unlikely to go well. 

The Prudent Path Forward  

Relying on predictions, investing solely in stock index and/or taking excessive risk are not the only potential path for investors, and certainly in our opinion not the most prudent even if they seem to be the most popular at the moment. 

I’ve often said that in my experience the right path forward as an investor means doing the thing(s) that seem the most difficult to do; such as buying “out of favor” assets, not chasing recent winners or making sure your portfolio is truly diversified. 

While valuations have many investors concerned these days, including us, that is really only an issue for a small number of investable assets. With interest rates finally returning to more historically “normal” levels don’t forget to look to fixed income and alternatives as a likely source of both stability and success moving forward. 

As always, we are here to help you and those you care about it get better prepared anytime. 

Have a wonderful weekend,  

Tim and the team at TEN Capital 

Data, Just the Data

• U.S. Jobless Claims – initial claims fell for the 4^th consecutive week last week for a total of 201,000. Continuing claims on the other hand rose by 23,000 to 1,867,000 but still below expectations.  

• Eurozone Retail Sales – slightly rose in November by 0.1% following a decline in October. Year-over-year sales for the region are up 1.2% 

• Eurozone Economic Sentiment – crashed in December to a reading of 93.7 in December for the lowest measure since November of 2020. France and Germany were the hardest hit while Spain sentiment surprisingly improved.  

• U.K. Composite PMI – fell to 50.4 in December for the lowest reading since October 2023. This is the 4^thconsecutive monthly decline for the region.