NEWS
What Happened Last Week
The Composite Purchasing Managers Index (PMI), which measures how many companies are seeing growth vs decline in various aspects of their business, fell slightly to the lowest point it’s seen in nine months. It remains expansionary, however, at 52.4 (above 50 is a positive signal).
The PMI is made up of manufacturing and service industries. Manufacturing improved and services fell, but encouragingly both are now above 50. This indicates health in both sectors.
Despite the slowdown of recent days, the optimism of small US businesses soared to 105.1 in December. This is its highest point since October 2018.
The Department of Government Efficiency (DOGE) could be one of many reasons investors and business owners are optimistic, but one risk to meeting expectations here is its limited powers (more like an advisory board). Congress and the President still hold the final authority to do what ends up being proposed.
Uncertainty is high following the regulatory freeze and hiring freeze in the government while President Trump begins enacting reforms.
Investor sentiment swung positive again after President Trump’s first days in office, according to the AAII Investor Sentiment Survey and Fear and Greed Index.
How I See It
Recession and bear markets are not a big subject of conversation these days.
Investors, by and large, have accepted the idea that we are in a bull market which is likely to continue through 2025.
This is fine, so long as it doesn’t get out of hand.
Markets are historically high compared with earnings, but it’s quite likely there’s good reason for that optimism:
- The Fed maintains room to implement meaningful monetary policy.
- AI infrastructure is a major focus this year and offers huge potential for productivity.
- President Trump has set a goal to eliminate ten regulations for every one new regulation put in place.
- President Trump is pushing for a reduction of the corporate tax rate from 21% to 15%, among the lowest in the world.
These are just a few of the myriad possible conditions that America may be headed for in the years ahead.
The stock market’s job is to account for the likelihood of all of these changes taking place, attempting to price companies as efficiently as possible with limited information about the future.
But the problem right now is that there is so much interrelated change that it’s near impossible to adequately produce an idea of what even next year will look like in terms of US economics. That’s called uncertainty.
The good thing about uncertainty is that it fades over time. There’s particularly a lot of uncertainty right now, because we’re still trying to measure exactly what will and won’t change. What can and can’t be done.
And when uncertainty is high, markets tend to be modest in their estimations of what’s likely. They usually don’t get too far ahead of themselves in times like this.
Historically, with Republican Presidents taking office, there is often a surge in the election year due to optimism over better business conditions, and then a moderation which happens in the inaugural year when reality reveals that positive change is not as easy or fast as we might like. The President’s powers still remain limited, and the effect of all of these changes combined is near impossible to reasonably predict.
So I’m glad that investors have remained somewhat skeptical these past couple of months, only now returning to some degree of cautious optimism.
If we were seeing extreme optimism, sometimes described as extreme greed or euphoria, then that would be a potential red flag.
This could be a year of higher volatility due to the uncertainty, but overall, I still believe it will end solidly positive.