NEWS
What Happened Last Week
October inflation numbers were in line with expectations, with the Personal Consumer Expenditure (PCE) showing an annualized 2.3% (slightly above the Fed’s long-term target average of 2%).
President-elect Trump proposed tariffs on Canada and Mexico from day 1 unless they’re willing to crack down on illegal crossings, fentanyl and crime coming across the border.
Israel and Hezbollah (based in Lebanon) reached a ceasefire deal Wednesday which allows two months for both sides to move troops out of Southern Lebanon. High tensions remain after 14 months of fighting.
Bank lending has slowed in Q4 but remains better than last year. Banks overall have reduced standards to lending, which means they have more willingness to lend now than last year. Lending fuels economic growth.
Investor sentiment is divided. Investors act as though they anticipate a strong market ahead, but a larger number of them voice concerns about a potential negative market over the next six months, according to the AAII Investor Sentiment Survey and Fear and Greed Index.
How I See It
Economic news continues to be a slight net positive, while sentiment is divided.
The main issues that raise investor concerns are threats of Russian aggression, closely watched inflation numbers, and speculation over the implementation and impact of tariffs.
That said, markets continue to bet on significant earnings growth over the next few years.
Decreasing regulation while increasing demand through tax cuts and the integration of AI technologies might be able to deliver the necessary growth. But according to stock pricing, it sure looks like the bar has been set high.
It seems to me that markets are already making their bets on this.
At present, I see 2025 potentially being a below average year. An average positive year is about 20%-23%.
And because expectations appear to be high, I suspect within the next six months there will be heightened volatility. My guess is we could even see a relatively quick drop of 10%-15% over some perceived negative which makes its way through the news outlets.
But I don’t believe we’re headed into a bear market, which is a long and deep downturn. We’ll have to watch closely for signs of real fundamental deterioration, but presently that doesn’t appear likely.
There’s just too much overall positive economic growth and potential, combined with monetary policy from the Federal Reserve and restrained investor sentiment.
Corrections are not a time to radically change risk factors. They cannot be effectively timed on a consistent basis. And because they only last a few months on average, it’s better to ride through them rather than risk getting out (and back in) at the wrong time.
We will have to watch closely to determine if the months ahead show inklings of a bear market beginning. But as of now, I believe this bull market has room to run through the end of next year, even if the positive returns may be below average next year.
Put options, which are relatively cheaper at the moment compared with the last six months, can help reduce some of that downside volatility for those who don’t want the full risk.
Focusing on beta can also offer additional help in navigating risk.