Stock Talk - Stock Market: Are We Heading for a 70s-Style Crisis in 2025? What's Going On?

Starting point is 00:00:00 Investors, high inflation, wars in the Middle East, Russia and Ukraine, protests on college campuses into the school year end in May, quite a few stock strategists and economists have made many valid comparisons to the early 1970s and what has been going on the last few years globally and in the U.S. in politics, socioeconomically, and even some in the stock markets. While I do have an MBA, I've taken all the economics and finance classes you can think of, and I've managed other people's money for the better part of 30 years now. My historical studies of the economy and the financial markets, whether it be stock, bonds, or commodities, tell me that it's not currently a repeat of the 1970s here in the United States

Starting point is 00:00:42 in the financial markets. However, there is a slight chance of a similar negative outcome in 2025 and on in stocks if central banks around the world err in their ways over the coming six to nine months. Investors, this is going to be a pretty short episode of Stock Talk, and hopefully it will go as smoothly as the hit early 70s song by Marvin Gaye called What's Going On? The lingering question for stock markets, investors, traders, asset allocators, sector rotators, and our economy is, what does hire for longer actually mean? And with the Fed still holding to that script while other central banks start cutting rates, will the Fed break something in the economy and the financial markets before they break inflation? back in their own eyes. Before we continue on with this week's content, I want to give a shout out to the entire Oak Carvest team as a few weeks ago the USA Today ranked us as one of the best

Starting point is 00:01:40 financial advisory firms at 2024. The award is given to the top registered investment advisor groups in the United States based on two key criteria. First, the recommendations from individuals from among 25,000 financial advisory clients and industry experts. The second, growth in assets under management over 12 months and five years respectively. I personally am looking forward to helping us move up this list over the coming years by taking care of our current and future client base. Investors, frequent viewers of our channel and listeners know I look for clues in the bond market to what's going on in the markets right now and what might be going on in the future because

Starting point is 00:02:18 of it. Our team doesn't just look at nominal interest rates, which are the interest rates you see quoted on TV or in your brokerage account or most discussed in financial markets. Our team looks at the two components of Treasury yields. Those two components, once again, one, inflation expectations, and two, real interest rates. First, inflation, as we all know, erodes the purchasing power of your money over time. Real interest rates are the premium bond investors require for holding treasury bonds. The level and trend in real interest rates of a treasury bond goes a very long way in affecting the overall PE investors are willing to pay for a stock

Starting point is 00:02:55 and what types of stocks investors favor. When Jerome Powell or the other Fed governors come on TV talking higher for longer, delaying interest rate cuts or fewer cuts and interest rates in the future to combat inflation, they are attempting to job-owned investors and keep real interest rate component of nominal treasury yields, which is used as a risk-free rate high. Investors, when economic data comes out like it did the morning of Friday, May 31st, traders in their computers almost always immediately adjust their expectation of real-time real interest rates and their computers buy and sell different baskets of stocks and sectors

Starting point is 00:03:32 based on that real-time data. I know you're thinking to yourself, but Chris, the PCE inflation data was just in line with expectations on that day, and the markets opened down and closed up well off their lows with the value-biased Dow Index registering its biggest daily percentage gain since November of last year. Many analysts on TV attributed to the big rally to month-end repositioning, which did help. It also helped that it was a payday, so there was blind price agnostic index fund buying as usual. However, I believe the catalyst was not the PCE data, but rather significant weakness in downward

Starting point is 00:04:09 revisions and other economic data that came out after the PCE. Adjusted for inflation, both overall consumption and disposable income dropped slightly in April and came in weaker than expected. Core prices rose less than expected on a month-to-month basis and the declines in real consumption and income mean the economy continues to slow, as do price increases. In fact, a number of retailers announced price cuts on thousands of products last week in an effort to stimulate consumer demand. Investors, price cutting is not a sign of a strong economy or consumer. So getting back to real-time data, here's a chart of the five-year real interest rates on a daily basis for the last five years.

Starting point is 00:04:51 As one can see, peaks in it, like late October of 2003, have coincided with low-year real interest rates. lows and pivots up in stocks, broad indexes like the S&P 500, and particularly value-biased stocks with higher debt loads, small-cap stocks with less dominant positioning in their markets, commodities, and even less profitable tech stocks. Sustained rises and higher trending real rates as occurred in the first quarter of 2022 through the third quarter of that year have hurt stocks and bonds together and have been particularly hard on high-growth stocks and small-cap stocks. Investors take a look at the daily chart of the S&P 500. with the same timing points and pivots up and down over the last five years circled.

Starting point is 00:05:31 As we've messaged for a number of years, level and trend in this real-time data series is key to divining shorter-term market moves. How short? Well, here's an Uber short-term chart of the same five-year real interest rate from last Friday, May 31st, and similar, very short-term five-minute chart of the S&P 500 Index. First, the S&P 500 Index. Down during the last week in May into the last week. Friday in May, which is quite normal, but as soon as the European markets closed between 11 and 1230 a.m. Eastern time last Friday, the foreign selling dried up, computer algos kicked in and kept buying in a less liquid market. Why? Because of this chart, the intraday rally of eight to 10 basis points in the five-year real interest rates from the overnight session and from the morning

Starting point is 00:06:19 when the PC data and other data was released. And all the data after the PCE came in weaker than unexpected in manufacturing and consumer. So the answer I have to the question of what's going on in the equity markets, that's it. The market is still wrestling with what the Fed and the economy will do. But the move up, the second half of Friday, May 31st, that shocked many, was quite typical for a market anticipating a soft landing in the economy and a normally, seasonally strong summer equity rally that usually begins when? Yep, as we previously discussed, the last Friday in May. And yes, investors, those summer rallies even included the dot-com bubble bursting year of 2000, when hopes for a second half, 2000 soft landing, were eventually dashed in the fourth quarter of 2000

Starting point is 00:07:05 through the first quarter of 2001. But not before a strong rally into mid-August that few investors recall, as most were still shell-shocked by the collapse in technology names that occurred during the first quarter and first half of 2000. For investors or retirees who have been fearful that the markets must be, experience in 1970s lost decade or who feel anxious or paralyzed so far, financial storms have not presented themselves the overall markets and in the index level in 2024, and that's a great thing. However, even so, if you're uncomfortable with a wider range of possible equity outcomes, the old Carver's team has launched a new strategy that retains the ability to go long stocks,

Starting point is 00:07:47 short stocks, as well as buy partial hedges and shock absorbers for a stock portfolio. Information on the strategy of ours can be found at oak harvest funds.com. For myself and from Eric behind the camera from the whole team here at Oak Carvest, thank you and have a blessed weekend. 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

Starting point is 00:08:29 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. Investing, involving, the risk of loss and past performance is not indicative of future results.

Stock Talk - Stock Market: Are We Heading for a 70s-Style Crisis in 2025? What's Going On?

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