Stock Talk - 2025 Stock Market: We Never Said it Would be Easy

Starting point is 00:00:00 Investors, there are no guarantees in the stock market in the first two months in 2025 are proving that a lesson to those who just entered the markets over the last two years and enjoyed over 20% returns. It's been a sloppy choppy mess that while uncomfortable to those watching day-to-day or week-to-week, as we previously warned, is not unusual. It is likely to be the case for the first couple of quarters in 2025. Take a look at the two-year chart of the S&P 500. I've drawn the general upward sloping channel we've been in for that time period.

Starting point is 00:00:30 On the chart, you'll see that we've traded outside this band in October 2023 for about a month, as many were preaching the end of the bull market, a recession, Elliot Wave Theory generational tops, were the biggest nonsense I recall at the time, the coming, a replay in the 1987 stock market crash. We felt none of those things would happen. We were coaching our followers to be buyers of stocks back done. On the same chart, you'll see the mid-summer pullback in July and August in 2024, caused by the unwind of the Yen-Carrie trade, de-levering pretty much on cue for a normal summer sell-off.

Starting point is 00:01:06 You'll see the gap higher in early October as Donald Trump won the presidential election with a landslide victory. Which brings us to here and now, the present, the first two months in 2025. January went up about 2.7% and February was down, about 1.4%. And take a look at the Bloomberg S&P 500's

Starting point is 00:01:24 seasonality matrix for the last 10 years. You can compare prior years, including the first Trump, term. However, the more important data set in my eyes is the one we presented for a number of months from the Quant Team Steve Sutmire's Group at Bank of America Merrill Lynch. It's the monthly average seasonal returns under the first year of a presidential cycle since 1929. As you can see, historically speaking, the first two months of the year are underwhelming net. In fact, the whole first quarter has historically been a sloppy choppy mess. Those who have followed the markets for a long time should not

Starting point is 00:01:59 be surprised about their neurotic start to 2025 for the stock markets. We've previously warned followers that 2025 was unlikely to be a repeat of that gloriously boring and straight line up of 2017 under the first Trump presidency. The main reason we did not see a direct repeat coming in 2025 was the fact that in 2017, Donald Trope focused on just one thing, lowering taxes and getting that policy through Congress. Lower taxes equals lower friction on consumers and corporations, and shareholders love that. The GOP's linear focus on taxes caused the S&P vomited to move upward in 2017 in a near linear and historic low volatility year.

Starting point is 00:02:42 Compare that to Trump 2.0 out of the gate. As we've discussed, it appears that Trump is going for the early shock and awe, taking on a myriad of policy changes in rapid fire manner. Immigration, tariffs, foreign policy changes, and government firings and downsizing by the Doge group. while potentially good for taxpayers and citizens over time, in the short term, do what? Yep, all these things increase the cost of the economy short term,

Starting point is 00:03:08 and shareholders in financial markets hate added friction. So the S&P 500 has gone almost nowhere since Donald Trump was reelected as of this filming February 28. As we pointed out, while others weren't, the economy was already slowing into the election as the momentum in the Biden era spending programs like the IRA peaked. mid-summer of 2024 and was already decelerating. As we also discussed in December, the current policies in D.C. were crushing economic growth expectations.

Starting point is 00:03:38 Take a look at the fast-twitch, one-year real interest rate chart. At peak Biden IRA spending last summer, it was 4%. Investors heading into the election, it had already been cut in half to about 2%. In post-election, it plunged back to zero. Why? Because all the current policies in D.C. are actually, anti-economic growth in the short term. Immigration reform is anti-growth and consumption over the short term, and so is tightening policy. Mass federal government firings in D.C. may be more efficient

Starting point is 00:04:10 and good for the U.S. taxpayer in the long term, but in the short term, it's bad for economic growth and consumer sentiment. Finally, with tariffs. Investors stop listening to politicians, tariffs are taxes on consumers, and initially promote higher prices and lower unit consumption and both are bad for economic growth in the short term. We've previously discussed this economic weakness and ongoing slowing fast trend a few weeks ago and are behind the scenes what many on TV won't tell you the economy is slowing fast video, giving numerous reasons including the ending of the Biden fiscal stimulus sugar high, as well as increased uncertainty and economic concerns of the Trump-Dodge programs

Starting point is 00:04:51 causing increased unemployment and dropping consumer sentiment and retail spending. investors, at the same time that growth forecasts are slowing to a halt, real-time inflation's expectations have steadily risen since Trump administration took office. That's the tariff programs as well as normal seasonality of inflation in the U.S. It took me leaving town for others to show their concerns and sell stocks hard at the end of February. Investors, however, please remember that the second half of February is historically one of the worst periods for stocks during a year, particularly under the first year of a presidential

Starting point is 00:05:25 cycle. Admittingly, I was getting a bit depressed when I came back from my vacation and a few days off in New York City last week with the market dumping. However, investors, there is hope. In last week's video, stock rallies start here, Friday fights and stock flights that aired just as the market reversed up strongly on Friday was my first shot at bringing you some good news behind the scenes. Actually, I got even a little more optimistic thinking about the next 18 months as the market's headed down early Friday on the Trump Zelensky argument with. happening on TV. Don't tell us what we're going to feel. We're trying to solve a problem. Don't tell us what we're going to feel. I'm not telling you. Because you're in no position to dictate that. Remember this. You're in no position to dictate what we're going to feel. Why, here's why.

Starting point is 00:06:12 What if Trump is crazy like a fox? As a voter, you don't have to like him or his policies, but that's not what investing is about. It's about return on capital and return on your investment. I got to thinking midweek. In Trump 1.0, he focused on the easy thing, or actually one easy thing, his first year in 2017, tax reductions, which all investors love. It was only after 2017. He started focusing on other policy agenda items, the hard stuff, the stuff that caused friction between investors and the economy. And he was doing that as the Fed was raising rates. What if this time around he and his staff have decided, let's tackle all the hard stuff first? What if they think the economy is pretty good, albeit

Starting point is 00:06:53 it overstated, but let's get all that friction items out of the way in the first six to nine months. Tariffs, immigration, efficiency, doge, defense spending. Let's get that all done first. And then we'll focus on the easy stuff. The stuff everyone who is a shareholder and consumer likes. The stuff of lower taxes and less regulation. Things that lower friction in the economy. Things that would accelerate the economy in late 2025 and throughout 2006. So GOP members can get elected or re-elected in the midterms in the second half of next year, 2006. What if, from investors standpoint, he's crazy like a fox? Think about that. The good news is, historically speaking, looking forward over the next three to six months is the seasonality is about to flip into investors' favor as a tailwind.

Starting point is 00:07:43 Looking again at the first year seasonality of returns from Steve Sutmeyer's group, if history is a good guide, you're supposed to be buying the February dip in stocks. Investors, why might this seasonality kicked in positive for stocks in the coming days and weeks ahead. Here's a couple of data series that support a rally starting here or shortly. Historically, real growth expectations for the economy almost always crater the first few months of a year. Look at the fast-twitch one-year real growth rate chart again. Look for the timing of the lows on the chart. I circled a bunch of them. Guess what time of the year each of those circles near the lows happened? Yep, between the last day in February in the middle of March. Call it option expiration in March, which this year is

Starting point is 00:08:24 March 20th. Before to look into inflation expectations chart, want to guess what trend you would see there over the long periods of time? Yep, you guess that one too. Inflation expectations usually peak right at the end of February or at latest by the mid-March. No guarantees in 2025, but history is on your side. Finally and possibly most importantly, in the span of fewer than eight weeks since Trump was elected, bears are everywhere, even with the S&P 500 only about minus 3 to minus 5% off its all-time high. We have referenced the AAI investment sentiment data extremes many times over my seven years here at Oak Carbis, including near the panic COVID lows in 2020, making a case for buying, not selling stocks. This measurement of stock sentiment has historically

Starting point is 00:09:08 been a very good contrary indicator with markets troughing when bears are high and the S&P 500 peaking when bears are very low. Take a look in an updated chart of just this bearish component of AAI-I hitting highs only seen at the COVID lows and the lows in the great financial crisis in the first quarter of 2009. Recall in March of 2020, the S&P 500 was down over 22% when the AAII reading hit positive 52%. The S&P 500 is currently down about 3 to 5% and bears have grown to 61%. Not only has the reading of bears skyrocketed, but the AIAI-Bes, bowl reading has plummeted. According to Chris Gallipo, senior market strategist at Franklin Templeton, since 1986, there have only been two readings of AAI Bowls less than 20%

Starting point is 00:09:55 and three readings of Bears greater than 52% for the last reading. The one-year average forward return from Bowls under 20% was almost 21% while the one-year average forward return of the SPV-H00 for Bears over 52% was a bit over 15%. Of course, there are no guarantees in the stock market, and this is based on historic investor behavior, repeating as it's been doing under the old normal since October 22. As we previously mentioned many times, soft landings in the economy do not guarantee no volatility. This time, the Trump administration seems to be going for that early shock and awe, taking on the tough policy issues first. The good news, we are oversold and historically speaking nearing what is normally a low in both economic growth expectations

Starting point is 00:10:42 for the first quarter and a seasonal low in the stock markets, along with, yes, a seasonal high in inflation concerns. As one can see, while February has historically been down in the first year of a presidential term, that downturn has historically been the best buying opportunity in soft landings, however rare they are. Investors know that regardless of the path for the economy and the financial markets in the next few months, the investment team at Oak Harvest will be here, and crewing the ship and adjusting our models where we can. We expect 2020, to be a very active year for active stock management. With that, from myself and from everyone here at Oak Harvest, have a blessed weekend.

Starting point is 00:11:21 All content contained with an Oak Harvest podcast expresses the views of the speaker and is for informational purposes only. It is based on information believed to be reliable when created, but any cited data, indicators, statistics, or other sources are not guaranteed. The views and opinions expressed herein may change without notice. Strategies and ideas discussed may not be right for you, and nothing in this podcast should be considered as personalized investment, tax or legal advice, or an offer or solicitation to buy or sell securities. Indexes such as the S&P 500 are not available for direct investment, and your investment results may differ when compared to an index. Specific portfolio actions or strategies discussed will not apply to all client portfolios.

Starting point is 00:12:09 Investing involves the risk of loss and past performance is not indicative of future results.

Stock Talk - 2025 Stock Market: We Never Said it Would be Easy

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