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

Five Things You Should Know

1. Equity Markets – were up this week with U.S. stocks (S&P 500) up 2.93% and international stocks (EAFE) up 2.29%.  
2. Fixed Income Markets – were also up this week with investment grade bonds (AGG) up 1.02% and high yield bonds (JNK) up 1.15%.  
3. Inflation – U.S. consumer prices saw their largest jump in 9 months in December, ticking up 2.9% year-over-year. Energy related goods spiked 2.6% last month, accounting for more than 40% of the rise in CPI. 
4. Bank of Japan – In the leadup to the central bank’s meeting next week the Yen had its biggest weekly gain since the end of November, with swaps markets now pricing in a 99% chance that interest rates will be increased. While sources say the BoJ likely won’t offer explicit guidance on the future rate hike path, they are expected to maintain their pledge to keep pushing up borrowing costs if the economy continues to recover.  
5. Key Insight – [VIDEO] This week brings Part II of “What Will the Market Do…” where we will delve more into some outlooks and insights from respected partners which range from the more pessimistic to the more opportunistic. [ARTICLE] We take a quick look at some of the latest data and related insights to frame the current market environment, and then share a recent piece referenced in the video above from Brian Wesbury on why he is skeptical about what may lie ahead in 2025.  

Insights for Investors

By Tim Mitrovich

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

While the new year, and for that matter the last month, has brought a definite uptick in volatility in both directions with a number of notable moves. After this Wednesday’s CPI data induced bounce, the market is back in the black. 

The euphoria of moving past the election, coupled with the sense of a more business-friendly administration, appears to be fading as of late even as recent data has appeared pretty strong. Most notably recent ISM data which saw manufacturing data rebound slightly to 49.3 (nearing the important growth demarcation line of 50.0), while ISM Services (the largest part of the US economy) posted a surprisingly strong reading of 54.1. Similarly, nonfarm payrolls far exceeded expectations of gains of 165,000 coming in at 256,000 for December. However, this latter data point sent markets lower last Friday for fear strong labor data will result in the Fed cutting rates less in 2025. A fear that may be overdone as wage gains and the national “quit” rate both pulled back signaling a less robust labor market than in recent years. 

Other recent positive data included the December NFIB Small Business Optimism Index which made headlines hitting a six-year high of 105.1 in December. However, as a purely survey data point, likely spurred by the post-election enthusiasm, investors may be wise to fade this sentiment when determining their risk budget. 

Beyond the fickle nature of sentiment is the fact that inflation appears to be gaining steam, or at the least proving far more difficult to control than had been hoped for, a point we have cautioned readers on for a few months now. However, this Wednesdays most recent data gave investors some hope. While we are certainly not trying to be too pessimistic, it is important to note when it comes to data the trend, not a single data point, is what matters most. And to that end, if the last eighteen months are any indicator, the story is not over when it comes to the battle with inflation. 

As noted by Apollo Chief Economist Torsten Sløk, the recent trend of data regarding inflation still appears sticky, “The recent jump in ISM Prices Paid points to a coming reacceleration in both headline and core inflation, see charts below.” 

Nonetheless, Wednesday’s report is a definite step in the right direction. As summarized by Trend Macro, “Big beat in core, which is what matters. For headline, gasoline was the culprit, contributing more than a third of headline inflation for December. On a year-over-year basis, core less OER fell for the first time in six months. Powell’s version, “super core”, continues to fall (too bad he never mentions it anymore).  A very good report.” 

While no one worth respecting would ever claim to truly know what lies ahead, especially over a given timeframe, there are certain laws of economic gravity many of which were bent and/or suspended over the last five years. To believe there won’t be some price to pay, somewhere, for the extreme measures taken over the last few years, does stretch one’s reason. 

As we touched on last week (see here January 10^th 2025), where we shared a number of other different analyst’s insights, it isn’t that everything is good or bad, but rather about having the process to look past general narratives to find the better risk-adjusted opportunities among the many seemingly overvalued assets. 

On the topic of economic gravity, and the US having to “pay a price for the bad policies of the past five years” read the great article below. 

And as always, if you or anyone you care about needs help converting ideas and stories into actionable personal advice we are always here to help. 

Have a wonderful weekend, 

Tim and the team at TEN Capital 

2025: A Year of Promise and Paybacks 
 
To view this article, Click Here. 
 
Brian S. Wesbury, Chief Economist  
Robert Stein, Deputy Chief Economist 
Date: 1/6/2025 
 

The College Football playoffs included 12 teams this year and all five automatic berth teams (because they won their conference championships) are now out, including the top two ranked teams, Oregon and Georgia.  It wasn’t supposed to turn out this way, and the debate about why has only just started.   

And if you think forecasting college football is hard, try the economy, stock market, and elections.  Not one Wall Street firm came close to predicting the level of the S&P 500 on 12/31/24.  They were all too low.  The sharp slowdown in growth, or even recession, that we forecast did not come true. 

Inflation stopped improving too, and even the Fed had to shift its forecast for rate cuts for 2025, reducing them from a total of one percentage point to half of that.  And don’t forget that most presidential election forecasts missed the shift in nearly all demographic groups even in blue states toward Donald Trump. 

All of this makes forecasting 2025 another significant challenge.  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.  In addition, tariffs are in the picture, as is a significant slowdown in immigration, with deportations of some immigrants who are already here. 

This follows some of the most dramatic policies in US history.  We’ve always thought that COVID lockdowns were a huge negative for growth, then and in the future.  Yes, we know GDP fell sharply early on, but then massive government spending (and handouts) along with the largest surge in the US money supply in the history of the country pushed GDP back up to its previous level (even with many states locked down). The stimulus masked the pain, like morphine. 

We have always believed the morphine just delayed the pain and a recession was inevitable once it wore off.  But the US is hooked on morphine, with irresponsibly high deficits creating government jobs and short-term spending stimulus.  If Trump and DOGE cut the deficit, the morphine will wear off.  With significantly less stimulus a recession is highly likely.  Not a deep recession, but one that causes real GDP to decline 0.5% to 1%, and corporate profits to disappoint for the first time in years.  

There are caveats to this forecast.  The debt ceiling is now back in place…this means the Treasury will finally dip into its checking account at the Fed.  This account holds over $750 billion, and when the Treasury spends that money, it will boost M2 growth.  So, while the federal government spends less, the M2 measure of money will rise no matter what the Fed does. 

This is one reason why we don’t expect inflation to fall much more.  We expect 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. 

At the same time…China is in trouble economically, while also making trouble geo-politically.  One thing we believe is that if the US gets its fiscal house in order, and at the same time projects power and not appeasement, the world will become a safer place.  In the Middle East, the October 7th massacre, which was absolutely horrific, was a turning point for Iran.  While peace might not break out, there is less chance of a wider war. Trumps victory is also affecting politics in many other countries, just look at Canada, France, Germany and the UK.  

So, while there are many positive things happening, this new world order is still uncertain.  Less regulation is great for growth, but reduced deficits are a short-term headwind.  In the long run, just like under Reagan, smaller, less intrusive government policies are a massive positive.  But, remember, the PE ratio of the S&P 500 was 8.0 in 1981.  Today, it is 28.2.  In other words, unless Trump policies lift productivity, growth, and profits immediately, while reducing inflation, the stock market does not have nearly the same upside that it did in the early 1980s. 

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. 

Data, Just the Data

• U.S. Jobless Claims – initial claims rose by 14,000 last week to 217,000 and above market expectations. Continuing claims on the other hand fell by 8,000 to a total of 1.859 million. 

• U.S. Retail Sales – rose 0.4% month-over-month in December for the 4^th consecutive month of gains. Year-over-year sales now sit at +3.9%. 

• U.K. Retail Sales – unexpectedly declined by 0.3% in December. Year-over-year sales now sit at +3.6%. 

• China Retail Sales – rose 3.7% year-over-year in December and above expectations of 3.5%.