Stock Talk - S&P 500 2025 3 Roads Diverged – The Great, The Good, and The Ugly

Starting point is 00:00:00 Three roads diverged in the yellow wood. Oh, wait a sec. That's not the poem. Hey, the O-Carbis investment team have often asked about scenario analysis and other potential outcomes for the stock bond and financial markets. This makes sense, as no one's crystal ball is perfect each and every year. Given its year-end in 2024, we already alluded to our best guess for now as to where the markets end in 2025. That's 6660 currently, as well as the optimistic repeat of Trump 2.0. SMP 500 equals 6.5.00 equals 6.25. 7,000 and everyone else's 2025 outlooks have been posted. I figured I would leave our followers with three scenarios for 2025, along with historical precedents that you could follow along if you want to. Let's call them the great, the good, and the ugly.

Starting point is 00:00:46 First off, investors, the great scenario. We've discussed this one multiple times, even back in the third quarter of this year in front of Donald Trump, who won re-election in early November. The great for 2025 is Trump 2.2.2. is Trump 2.0 in 2025 mirroring Trump 1.0 of 2017. Take a look at the three overlays of the most important charts for that scenario. First, the SEP 500, then the 10-year treasury yields, and finally the DXY dollar currency basket, which I personally think will be the key to 2025.

Starting point is 00:01:20 Recall that 2017 turned out to be Goldilocks on steroids for investors and a nightmare for traders. Why? Because the biggest drawdowns throughout 2017 amounted to barely minus three and a half percent. And after the first quarter, the max drawdown in the SP500 range from about minus two and a half to minus one and a half percent. 2017 was glorious for Bowls because earning surprise to the upside on the back of a decent economy, long-term interest rates declined on the back of a Fed that was raising rates and an economy that was slowing as well as inflation that was gradually declining. into the mix, the dollar went on a 12-month sell-off that boosted other global assets in markets such as China, and if you are long most everything, except for energy, you made money.

Starting point is 00:02:06 A repeat of all of those things can get the S&P 500 to around 7,000. But my work says that volatility must collapse back below 12 like it did in 2017, and like it was doing it realized volatility markets pre-election in late November of this year. Okay, the second scenario is merely the good. What's the good in our work? It's about 6660 on the S&P 500, which would be about plus 12 to 13% from our 5,900 currently on the cash S&P 500. The good is a continued soft landing in the economy. Higher earnings, flatish-long bond yields, and peaking to stable dollar.

Starting point is 00:02:45 The good scenario anticipates a range of normal volatility that we've experienced over the last 10 to 15 years, leaving out the COVID collapse. That's a range of implied volatility futures. say from 14 to 22 and a half. I said volatility futures, not the spot VIX, as I found little to no study linking the level of spot volatility to equity returns. The trend, yes. And the level relative to the forward volatility that's actually traded, sure, but there's no actual spot volatility. That's a calculation. The best historical precedent for this one is probably 1994 through 1997, with 1995 being the year we experienced comparable to 2024.

Starting point is 00:03:26 We actually discussed this 95-96 period early this year, as many doomers were calling for crashes and economic calamity. Why did we reference this one? Well, that's one of the few times in stock market history that the Federal Reserve was actually able to engineer an economic slowdown without causing a dramatic economic downturn or recession or a financial collapse in the markets. Back then, Alan Greenspan and the Fed cut rates from 6% to 5 and a quarter percent over six months in the second half in 1995. cooling the economy without tanking it. As much hysteria as there is in the current financial press about rising long-term treasury yields,

Starting point is 00:04:03 even back then, U.S. Treasury yields ended higher in the 12-month period following the first rate cut. Overall, bond total returns, trailed cash returns, meaning you wanted to stay in shorter-term maturity treasuries for the soft landing. Here are those same three charts, the S&P 500, the 10-year treasury, and the dollar index from 1995 and 96 overlaid,

Starting point is 00:04:24 with 2024 and 2025. 1996 still saw a soft landing for the economy, but market volatility ratcheted higher throughout the first half at 1996. Current forward volatility markets suggest a similar scenario might unfold in 2025. Investors in this scenario, the bull market would continue running in 2025, ending the year overall higher, but the bulls might pause in late February, spending much of the late first quarter of 2025 and second quarter of 2025,

Starting point is 00:04:53 2025 navigating higher volatility under this scenario. Just to remind those who weren't investing in 1995 and 96, the SP 500 started the year in 1996 on a bit of a sour note, selling off for the first few weeks of about minus 3.5%. But then it found its footing into earnings and rallies strongly put the index up around six and a half to seven and a half percent into April. However, investors overall, post mid-February of 1996, the S&P 500 did nothing net except trade in a very wide range through late July. During the summer of 1996, the S&P 500 got to up about 10% on the year, but it then sold off minus 9.5 to 10%, and a summer swoon before regaining its

Starting point is 00:05:36 footing and ending 1996 on a very, very strong note with the markets up about 20% on the year. Okay, the third and final scenario, one which we continue to think is highly unlikely. Yes, it's the ugly. It's a repeat of the dot-com peak and the tech collapse with the AI and Bitcoin, being this cycle bubbles. It's the 2024 repeat of the 1999 euphoria and the Fed reversing course in 2025 and actually raising interest rates, killing both the economy and the stock markets. Investors take a look at what that overlay might look like for the S&P 500. Yes, that would be ugly. It would have 2025 being 2000 and the Fed creating a policy

Starting point is 00:06:17 mistake by raising short-term rates and the dollar breaking out to new multi-year highs hurting earnings and other global economies. Investors, in this scenario, it would have the best trade being the S&P 500 prints its high for 2024 on the last day of the year, which would feel great. But the trade would then be to sell every rally of the S&P 500 up over 3 to 5% on the year through late August. Let's call that 6,180 to 6,300 cash S&P 500 all year, and then short everything on monthly rallies for 18 to 24 months, As recall, after the summer 2000 peak, the SP500 fell almost 18% into mid-December 2000, closed 2000 down 10%, which would be about 5,400 now.

Starting point is 00:07:04 Then it fell minus 38% in September of 2001 and down almost 50% before it was over in September of 2002. You can do the math on those outcomes, but we do not currently think this ugly.com bubble burst is a likely scenario over the upcoming few years. That said, investors remember that a run-of-the-mill recession in these stocks has the SP-500 down minus 25 to minus 35 percent from peak to trough. Yes, those are normal recession downturn numbers. We had an earnings recession for six months in the first half of 2022, even though politicians and economists still want to debate that one. Remember what stocks did back then? The S&P 500 dropped, minus 25 percent peak to trough, and you add in the inflation near 10 percent, and you get almost

Starting point is 00:07:51 a real return drop of minus 35%. Folks, that's a recession in the markets. Investors, going forward, a run-of-the-mill recession from here and the U.S. would equate to about 4550 to 4,000 on cash S&P 500 in my work. That is not a pleasant thought, but we will have a recession again in my lifetime. So that's it, my scenario analysis for 2025.

Starting point is 00:08:15 Three, what if outcomes, let's call them the great. Call that Trump2.0 Echo. The good, call this one the long, soft landing. And the third one, the ugly. Call it AI for avalanche in progress. The dot-com bomb history repeats. For now, scenario two, S&P 500, 6660 is my likely outcome, with the Trump 2.0 is the next likely candidate,

Starting point is 00:08:39 and the AI avalanche unlikely for now. These three scenarios all bear watching, and the team at O'Carvis Financial Group will keep an eye on the real-time, real data, try to keep you informed with what we're thinking regardless of how 2025 should play out and whether our crystal ball is seeing the fat pitch well or just seeing a lot of clouds and a lot of fog. But infestors, before you dismiss myself or the likes of Tom Lee, who says 7,000 plus, for Rich Ross, who've been more right than wrong over the ongoing bull market,

Starting point is 00:09:10 in favor of those retired billionaire hedge fund managers, or Dumers like Jeremy Grantham, or Robert Kiyosaki, for other newsletter writers who keep trying to scare you, and have been horribly wrong, ask yourself, have they been right? Have they been right lately? Have they been right consistently? Or were they just one-hit wonders from years, if not decades ago? We keep popping up in your social media feed because of a catchy computer algorithm and knows your age, knows your gender, knows your political beliefs. My suggestion to you, investors, is with 2024 coming to a close, talk to your financial advisor, walk through your financial plan, and determine if you and your money, are taking the right amount of risk, given your current spending and budget, and determine

Starting point is 00:09:54 if you are taking too much or not enough risks to meet your longer-term retirement goals. And with that, the Oak Harvest team wishes you and your family a blessed holiday and have a happy new year and ahead in 2025. 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.

Starting point is 00:10:29 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 investment. Index. Specific portfolio actions or strategies discussed will not apply to all client portfolios. Investing involves the risk of loss and past performance is not indicative of future results.

Stock Talk - S&P 500 2025 3 Roads Diverged – The Great, The Good, and The Ugly

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