The indicator known as earnings-revision momentum— the ratio of upward versus downward revisions to analysis forecast per-share earnings over the next 12 months for the Standard & Poor’s 500 stocks—-has slumped into negative territory and is hovering near its second-worst reading in the past year, according to Bloomberg.
Today’s video is Fed One and Done in December? On November 13, the CPI inflation numbers showed inflation ticking up slightly, but the market still believes the Fed will cut rates again in December. On November 13, the CME Fedwatch tool had it at 83% odds we’ll get a cut and I think it’s almost certain. However, when the Dot Plot forecast of GDP, inflation, and interest rates is released in December, I think we’ll see much more uncertainty for the future and likely a planned pause. The three major factors poised to affect the economy are a substantial tax cut, high tariffs and the possibility of mass deportations promised by the president-elect. While two of those items may cancel each other out–with tax cuts being massively stimulative and tariffs cutting into growth by 1.5-2 percentage points while raising costs for consumers, the question of deportations remains. Mass deportations could result in a huge labor shortage and disruptions to supply chains, leading to higher prices. The economy will be under a lot of inflationary pressure from these potential policies and it’s likely the Fed will announce a pause until they see how this all shakes out.
I think we can expect another huge tax cut package to extend the tax cuts from 2017, and a set of tariffs on China, the European Union, and other trading partners with duties of somewhere between 20% and 200%, and an effort to deport 11 million illegal immigrants (and maybe a few legal immigrants too) And in the face of that policy mix I don’t think there’s any way for the Federal Reserve to reach its goals of getting inflation down to 2%, of lowering interest rates from levels left from the pandemic emergency, and of keeping the economy strong enough to prevent unemployment from climbing. Can’t be done. The Fed doesn’t even begin to have the tools to tackle all those challenges at once. And there’s a non-zero and statistically significant chance of a really serious mistake that would take a big bite out of the economy and the prices of financial assets. Can I tell you why I believe this?
Inflation ticked up slightly on an annual basis in October, the latest evidence that further reductions in inflation are getting hard to achieve. The Consumer Price Index climbed 2.6% from a year earlier, up from September’s 2.4% annual rate, the Bureau of Labor Statistics reported today. Core inflation, which strips out more volatile food and energy prices, held steady at 3.3% annual rate.
Look out for more volatility in the bond market. BlackRock, JPMorgan Chase. and TCW Group have all warned that the bumpy ride is likely far from over. But also expect that the big overall trend for 2024 of rising bond prices and falling yields on hopes for aggressive interest rate cuts from the Federal Reserve is done.
With financial markets deeply conflicted about the effects of a Trump Administration’s policies on taxes, the deficit, mass deportations, and sky-high tariffs will have on the economy and interest rates the October Consumer Price Index (CPI) due Wednesday takes on added importance. Wall Street economists expect headline inflation rose 2.6% annually in October, an increase from the 2.4% rise in September. Core inflation, which strips out more volatile food and energy prices, is forecast to have climbed at a 3.3% rate year over year. That would be unchanged from September’s increase.
I expect more breathless speculation on who will fill the most important posts in the Trump Administration that will be sworn in on January 20, 2025. The consensus, which I agree with, is that this administration will be much different than the first Trump team with fewer figures with anything approaching old-style conservative Republican credentials. Thinkoif the contrast between second Trump administration vice-president J.D. Vance and first administration pick Mike Pence. That difference has made any meaningful handicapping of this race for power extremely difficult–even though the issue of who will fill what chair is incredibly important. For investors I think the most important pick to watch is Treasury Secretary.
Today’s video is Rally to Continue Through December; I’m Worried About January. While I recorded this video on November 5 (before the election results), I still believed we were looking at a rally through the end of the year. Looking at the patterns of earnings and cash flow, and with the election complete, we’ll continue with this upward movement until January. Generally, rallies happen every December as money managers look to buy to “window dress” their portfolios at the end of the year. Now that the election is over, any pre-election hedges will turn into more cash entering the market in December. Fourth quarter earnings will likely be the best of the year but the problem is that 2025 will not see as much earning growth as 2024. Likely, in January, companies may issue negative guidance for the year ahead. I don’t expect a depression or recession, but I do think we’ll see a slow down/pull back and we’re certainly due for 5-10% correction. Continue to ride the wave through December, and then look to make some profits in January. Selling in the new year will also mean you don’t have to take the tax hit this year
President-elect Donald Trump and Republican Congressional leaders are already promising to push through a new round of tax cuts to replace the 2017 cuts that expire in 2025. New tax cuts, they say, will be the first legislative–as opposed to initiatives by executive order such as new Trump tariffs–priority after the new president is inaugurated on January 20 2025. With Republican assured of a 53 to 55 seat majority in the Senate and likely to retain a majority in the House of Representatives, there’s not much Democrats can do to stop the cuts from becoming law.
Today’s Hot Button Moves NOW video is “Yield Drought.” CDs that used to pay 5.25% are now paying closer to 4.90% on the high end and Treasuries yields are also falling. As stock prices rise, dividend yields fall to. I think this yield drought will continue to get worse. You have to be opportunistic and BE ready for bouts of volatility. Keep an eye out for temporarily depressed stocks and buy those for the yields. I’ll be releasing a special report on dividends and yield drought next week. Keep an eye on your email or subscribe to get alerted when that report drops.
The Federal Reserve lowered interest rates on Thursday by a quarter of a percentage point. The cut was the second this year, following on a larger than usual 50 basis point cut in September. The size of this cut was expected by the financial markets. Wall Street is expecting another 25 basis point cut at the central bank’s December 18 meeting. With the cut and its size so widely expected investors and traders were left trying to find policy hints in the Fed’s words. The pickings were rather slim.
When I posted the previous version of this Special Report back on September 30, I wrote: “I don’t know which candidate will win the election. Right now the polls are within the margin of error on the national level–and even tighter in the seven battleground states that will likely decide the election. But I do know the results on November 5 will move stocks. Some right off the bat even before the results are certified. And more significantly as a new administration clarifies its policy views and takes office.” That has changed just a bit with last night’s victory by Donald Trump. We do know who won and will be the President come January 20. And we do know whose policies will move stocks and the financial markets in general. So let’s see if I can bring my picks and strategic advice up to date.
