Weekly Thoughts: January 6, 2025

The December rally many hoped for was a bust as the S&P closed last Tuesday with a MTD loss of 2.62%. The entirety of last week’s four days of trading that bracketed the year end and first two sessions of 2025 saw returns of -0.48% but did end of a positive note with a +1.26% jump on Friday. Modest economic reports for the week included US Manufacturing rising at a moderate pace for December while the ISM gauge hit 49.3, beating expectations yet below the 50 level that indicates expansion.

The Friday rally was an example of investors conditioning to buy dips, as the market had rough month, although the drop considering the size of the rally for the year doesn’t even measure in our book as a correction. The five previous days dropped for the longest consecutive day losing steak since April but far short of the early August percentage decline. Recent analyst warnings of possible slowing on earnings growth for the so-called MAG-7 were ignored by investors as shares of flagship AI stock Nvidia +5.44% for the week, with the majority coming in the final session.

There was a degree of concern that the Republican-controlled House of Representatives would struggle to reelect Speaker Mike Johnson and that could possibly prevent quick party unity to assist the second Trump Administration to hit the ground running in what is hoped to be a business-friendly deregulatory agenda. This idea is reasonable as market sentiment can have minor shifts over the course of a longer trend. However, what will ultimately mean more to markets is actual policy, not the political ebbs and flows we are relentlessly subjected to from Washington.

As January 20th approaches, there will be more strategists with analysis on the probable effects of Trump policies. After a strong year where the market never suffered a full 10% correction, [measured by the S&P 500] we are not going out on a limb to state investors should be prepared for a more volatile ride this year. Tariffs bring inflation concerns and deportation raises angst over labor disruptions. However, we would caution against certainty of outcomes as each issue has a series of questions that may ultimately determine the path the policies take. How many tariffs, what is the size, how long are they in place, do they lead to negotiation or do they lead the contra-country to respond and inflict a trade war? We would caution readers to understand that opinion pieces with certainty of outcome in EITHER direction may be unduly influenced by political bias. Predicting the output of a policy based on previous examples is helpful, but in economics, all things are not always equal so just because Trump 1.0 tariffs did not result in inflation does not mean that will be the end result in this term. And of course, because tariffs are generally inflationary does not close the door on a different outcome.?

After the Christmas week drop in yield for the 10-year treasury, bonds were sold to end Friday at a 4.60% level, with most of the rise occurring on Friday. The US Dollar Index, which had a powerful bull move since the November election softened modestly toward the end of the week. There is nothing to report of significance other than we are laser focused on the 10-year along with the dollar as major factors on where equites go in 2025. With valuations high, there will be only so much pressure investors can take if yields march higher. The dollar exchange rates tell us a lot about global central bank direction as currency differentials are largely driven by rates and of course economic growth.

In addition to the economic signals the 10-year sends, strategists that have been calling for small cap outperformance started to see some sun shine on their view until market rates broke higher in the last quarter of the year. In general, large cap regained outperformance when rates rose and the small cap bursts were more significant when market rates fell.

While we have pointed out the extremely wide spread vis a vis history of growth and value stocks in the last two years, short-term value relative strength has been short lived. However, we remain of the viewpoint that for equities to shine yet again in 2025, market broadening is essential. Even if investor cash continues to pour into the AI themed tech stocks, multiple expansion in that subset would be long run dangerous. For indices, there does not have to be a slamming of growth stocks, but a broadening of the performance—which did improve in 2024—needs to expand further.

The first full week of trading in 2025 will be a build up to the first employment data of the year, the December non-farm payroll report on Friday. Expectations current sit at +155,000 with a steady unemployment rate at 4.2%. ADP employment and Initial claims over the two proceeding days will provide investors with a full slate of employment data information on how the previous quarter ended.? We will also receive minutes of the recent December FOMC meeting and since that was the “hawkish cut” with multiple dissenters, the information will be helpful to investors and fascinating to economics nerds. Final Services PMI and Factory Orders kick off the week on Monday and only one Fed speaker is scheduled, Richmond President Tom Barkin.

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