In 2024, the U.S. economy added a remarkable 2.2 million jobs, surpassing pre-pandemic levels of job creation. The previous month, the labor market maintained its vigorous momentum, with unemployment dipping to 4.1%. Payrolls surged by an impressive 256,000, job openings lingered at a robust 8.1 million, and wages experienced a nearly 4% year-over-year increase. Corporate earnings also flourished, climbing approximately 10% in 2024, with projections suggesting an even more robust 12% growth for the current year. Consumer sentiment is buoyant, as evidenced by record air travel figures in 2024, anticipated to rise further in 2025.
If this portrait of the economy resonates positively, one’s interpretative skills remain intact. Yet, amid the promising news of improved business profits and future prospects, the stock market has caught a cold. Following a tumultuous journey, the 10-year Treasury yield oscillated from 4.6% to 3.6% and back again since last June, leaving investors with the unsettling impression that the bull market has passed its zenith.
As inflationary pressures mount from this robust economy, the expectation has shifted from anticipating the next rate cut to bracing for the Federal Reserve’s inevitable rate hikes, which could usher in economic pain. The yield range of 4.4% to 4.6% on the 10-year bond has triggered subtle alarm bells; however, it is the 4.7% to 5% territory that could incite more pronounced selling.
In December, we issued our sell signal charts at the peak of the S&P and Nasdaq, maintaining our stance that investors should seize the opportunity to buy during this correction, which we consider a normal market fluctuation. The mega cap biased SP 500 Index has fallen a modest 5%, but the more representaive equal weight S&P 500 Index is down a normal but healthy 8%. Yet, oversold conditions remain elusive, necessitating a selective approach to new purchases—particularly in the “Trump trades” we’ve previously discussed, such as natural gas infrastructure (ENFR) and Bitcoin (IBIT).
While a modest rebound in the market leading up to Trump’s inauguration on January 20th would not be unexpected, the stock markets are unlikely to overlook any further interest rate hikes. Until our indicators and sentiment approach oversold territory, it remains premature to fully deploy sidelined cash. The ideal scenario for investors unfolds after a protracted bear market, characterized by an economy contracting sufficiently to drive interest rates down, thereby maximizing monetary and fiscal stimulus measures.
Long-term bull markets do not necessitate such a backdrop, and this economy possesses ample liquidity and demand to propel profits and consumption higher over the next couple of years. The silver lining today is that the economy is undeniably strong. The caveat, however, is that it is not weak—a nuanced reality that demands careful navigation this quarter.
