Stock Talk - Top Reasons for a Weak Start to 2025 in the Markets

Starting point is 00:00:00 Investors, I bet you're wondering why most equity markets have started the year on a sour note. In this video, I'll break down a few of the reasons behind this rocky start and explain why, from a historical perspective, it might not be as alarming as it seems, especially during the second or third year of a soft landing after periods of significant growth. But before I dive into this week's topic, I want to invite you to join us on Thursday, January 23rd, at 6.30 p.m. Central for Old Carbis Financial Group's first half market outlook. We'll be live streaming much of the event on YouTube, and it's a great opportunity to gain insight into what's ahead for the markets.

Starting point is 00:00:37 You'll find a registration link in the description below, and don't forget to drop any questions you'd like our team to address in the comments section of this video. We'd love to hear from you. The U.S. stock markets represented by the S&P 500 have started 2025 on a down note. After gaining over 23% in 2004 in price, and about 25% in total return, including dividends, the SP500 is down about minus 1% year to date. However, investors since reaching its absolute intradate peak near 6,100 on Friday, December 6th of last year,

Starting point is 00:01:10 which was my 59th birthday, the SP 500 has declined about 4.35% from its closing high that day to this writing. And with that, many of the usual suspects have come out of the woodwork with their annual crash cart calls, whether they will finally be proven correct after 10 to 15 years of making the same call, I don't know. What I do know is that we've discussed this kind of possible downward action to start the year since early December of last year. Why? Because soft-landing economic scenarios do not guarantee constant upward-trending stock markets

Starting point is 00:01:44 with low volatility. How do we know this? History. As we've discussed for the better part of 15 months, the last time the Fed was able to commandeer a true soft-lander. for the economy and stocks was 1994 through 1997 under Allen Greenspan. Alan Greenspan raised rates in 1994, then he cut rates by 75 basis points in the second half of 1995 and subsequently paused rate moves for almost all of 1996. To help jog your memory, here's the same

Starting point is 00:02:13 overlay we've presented for quite some time, the last soft landing with our current one, the one that started in late 2003, running through 2024, and currently continuing, with the help of the Fed, which previously cut Fed funds by 100 basis points in the second half of last year pre-presidential election. What happened during the previous Greenspan Soft landing in 1995 through 97? After experiencing a plus 30% upward move in 1995, the S&P 500 came out of the gates in 1996 and did what? Yep, you guessed it.

Starting point is 00:02:47 It dropped near the exact same percentage high to low as it has the last four to six weeks, minus 4.33% by my calculation with my Bloomberg data. While history doesn't often repeat exactly, it does often rhyme. Why? Because humans are creatures of habit, and as I like to say, many are the same people, managing the same money, making the same decisions, so you get very similar outcomes. So let's talk about a few of the potential reasons behind the week's start 2025, despite the economy appearing to be on solid ground. Okay, investors, the first note, the supply and demand for economic,

Starting point is 00:03:23 is a bit out of balance to start the year with more sellers than buyers putting downward pressure on stocks, particularly last year's winning stocks. There are two factors influencing the supply and demand of stocks right now. First, with the market's strength of 2024, many investors push their stock sales and tax events out into early 2025. Heck, why sell in late 2024 and have to pay taxes in the next few months in 2025 when you can wait a couple weeks, sell your stocks in early 2025, push the cash tax event out into late 2025 or even later. Second investors on the supply demand side, on the tax side, stock sales in early 2025 are likely being influenced by the expectation that while Trump 2.0 administration may extend the current tax brackets beyond

Starting point is 00:04:10 2006, it will face greater challenges and significantly lowering income in capital gains tax rates than it did during Trump 1.0. If an investor thinks that Trump winning, and current tax bracket extensions is good enough for Saharis Biden win and higher tax rates in 2006 and going forward, that's probably a good reason for many rich investors or highly concentrated investors to sell now and take the sure thing. Finally, on the supply demand front, we're in peak season for the blackout window for corporate stock buybacks. Heck, what does that mean?

Starting point is 00:04:44 It means that the vast majority of companies that have announced stock buybacks cannot, cannot legally and actively be in the market bidding for their own stocks on down days as we've been experiencing year-to-date. The data I've seen says that upwards of 90% of all corporate stock buybacks are on hold this week near the maximum level in the quarter and near peak for the year. As companies started reporting this week, like the banks and financial companies, over the last few days, their buyback windows will open with a wave of additional active buyers starting next week. However, remember, most companies have to wait 48 hours after reporting earnings to get into the market transacting in their own shares. Because of this, you might have

Starting point is 00:05:25 heard several traders on TV saying they personally follow a rule of waiting two to three days after a bad earnings report before they consider buying a stock they're interested in. What they're saying is they're okay with waiting for the initial selling smoke to clear before establishing a long position buying the stock. Additional macroeconomic reasons for the week, Weeks start to 2025 include the recent strong jobs number, which pushed longer-term interest rates higher on the back of first, fear of a slower Fed in 2025, and second, stronger wage markets and higher inflation. Both are valid reasons for traders to sell short-term and stocks to drop lower, as higher

Starting point is 00:06:05 long-term rates do marginally hurt consumers looking to borrow and spend, as well as hurting more highly leveraged companies. Higher trending rates also have a downward effect on PE. multiples for equities, as first, treasuries can become more attractive than the uncertainty of equity investing. Second, you have to discount the future cash flow of your investment by a higher interest rate, which mathematically lowers the present value you're willing to pay. A stronger dollar in late 2004 and early 2025 is also weighing on investor sentiment. Why would this happen? Don't we all want a stronger dollar if there's truly U.S. exceptionalism? Isn't a stronger

Starting point is 00:06:42 dollar good for America? The answer is yes and no. Yes, a stronger dollar is good for America and good for American consumers, purchasing goods, produced overseas, or traveling internationally. But investors, it's bad for foreign consumers as it drives inflation for them. Investors, a stronger dollar is a definite headwin for the S&P 500 overall as much of the S&P 500, upwards of 40% of the U.S. company's operations are in multinational areas. The likes of Jane, Pope, Pepsi, Caterpillar, and even technology companies based here, selling elsewhere, accounts for anywhere from 25 to 50% of their goods and services outside the United States. For these multinational companies, a stronger dollar is a headwind to both revenue and

Starting point is 00:07:27 earnings growth as it depresses both numbers when their foreign sales are translated and converted back into U.S. dollars. Look no further than the recent reports from both Oracle and Adobe in the software technology space, warning of hundreds of millions of dollars in headwinds to the recent fourth quarter 2024 and their future first half 2025 revenue and earnings due to the strong U.S. dollar in the second half of last year. Expecting more of the same from most large-cap multinational S&P 500 companies, aggregate earnings estimates for the fourth quarter of 2024 and the beginning at 2025 have been coming down over the last 48 weeks. While this is a very normal occurrence

Starting point is 00:08:08 at this time of the year seasonally, it does serve as a headwind to equities, particularly as longer-term interest rates have risen. An additional headwind to global growth, economic demand, and earnings growth in 2025 continues to be China. China's domestic consumption economy is pretty bad right now, and the stimulation programs announced to date don't seem to be working yet. China is still one of the top economies and largest markets in the world for products and services, and whether you agree with their political policies or not, global stock, markets and investors would be best served if they put in place some programs to stimulate consumption by their own population domestically in 2025 and 2006. Maybe they're waiting to see President

Starting point is 00:08:51 Trump's hand and game plan. I don't know. But they did stimulate in 2017 and their markets were one of the best performing asset classes that year, even with Trump tariffs and geopolitical tensions. Equity markets would like an adrenaline boost from China in 2025, not more of the meandering lower that's been going on now for a few years. Investors, those are just a few of the reasons why we've seen a bit of a rocky start at the beginning of 2025 in equity markets, even with the higher confidence of Trump 2.0 with lower taxes, lower regulation, in a soft-landing economy. As investors can see by the soft landing under Allen Greenspan, historically speaking, it isn't unprecedented for mid-years in a soft-landing environment to begin this way. We've referenced

Starting point is 00:09:37 1995 through 97 many times in the past year, the market's starting 2025 weaker with higher volatility out of the gate, as we previously mentioned back in December. However, investors, this doesn't mean that bull market for U.S. equities is over for that 2025 can't be the third year in a row of healthy investor gains in U.S. stocks. If I've left any of your questions unanswered. I'd like to invite you to join us next week, Thursday, January 23rd at 6.30 p.m. Central right here on YouTube for Oak Harvest Financial Group's first-half market outlook. We'll be live streaming from Oak Harvest channel much of this evening's events, and it's a great opportunity to hear our take on what lies ahead.

Starting point is 00:10:17 You'll find a registration link in the description below, and as always, feel free to submit any questions you'd like us to address in the comments section of this week video. We're looking forward to seeing you there. Investors, until next week or until we meet again, have a blessed weekend, and my prayers go out to anyone affected by the fires in California and in Los Angeles.

Starting point is 00:10:37 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 personal. personalized investment, tax or legal advice, or an offer or solicitation to buy or sell securities.

Starting point is 00:11:12 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 involves the risk of loss, and past performance is not indicative of future results.

Stock Talk - Top Reasons for a Weak Start to 2025 in the Markets

There aren't comments yet for this episode. Click on any sentence in the transcript to leave a comment.