Sharpen Your Pencils: Preparing for 2025’s Market Dynamics

Stock optimism and bond anxiety: 2025’s market dynamics start now. Explore the forces likely to shape the months ahead.

No rest for the weary. Are you still locking down your new year’s resolutions? I am sure that you spent the past few days reflecting a bit and getting ready to tackle 2025. I am not a big new year’s resolutions guy as I was brought up on the principle that “no day is better than the present.” When an opportunity arises, you take it with both hands, and opportunity on Wall Street doesn’t ever present itself in a very convenient way. However, as the period of Christmas through New Year’s Day is often somewhat quiet, I tend to spend a bit more time than normal thinking about the year ahead. It’s just practical. This year, however, both holidays fell in the middle of the week, and as one might expect after this rather extraordinary year, markets didn’t exactly tie a bow on 2025 and send us off with a kiss. No, the markets ended the year in an anxiety-driven, cold sweat. However, under all that sweat, none of the underlying macro factors that got us to December 24^th had changed, allowing the calm and prepared amongst us, a minute or two to ponder. I was able to soft launch a couple of 2025 ideas with my wife, and in reflection, I have to say that I am… well, optimistic. BUT, alas, today is the first trading day of the year, so all that floury, prefrontal cortex thinking must be packed away for now.

Do you have a plan for 2025? You should, and I am sure if you are a regular follower, you do. By the morning of November 6^th, the day after the election, markets had pretty much digested everything they could from Candidate Trump, but for a few post-win appointees which only solidified some of the markets’ jubilations… and fears. Have a look at page 17 in my attached daily chartbook and try not to giggle at the stark image of how all the sectors scattered immediately after election day, marked by the vertical, dashed line. That is THE MOST TELLING CHART YOU CAN FIND—trust me. Just please look at it; it only takes two clicks to get to it.

The only thing missing on that chart is the bond market, which very much did its own thing in the wake of Trump’s win. Bond traders had been busy pushing longer-maturity yields higher as Trump’s prospects grew throughout autumn. Tariff-driven inflation combined with deficit-swelling incentives are yield stimulants, and Trump’s would-be policies are fraught with much of those. You can see that on page 16 of my chartbook. 🧐📈 I would say a 100 basis-point move higher in 10-year Note yields WHILE THE FED IS LOWERING RATES is notable, wouldn’t you? But, my friends, the jury is still out. Bond markets have factored in a worst-case scenario which includes raging inflation and eye-watering national debt levels. Here is the wrinkle in that thesis. We know that Trump has a tendency to use stock market performance as a scorecard for his success, but this time around, it is the bond market that is going to give him the most useful feedback. The good news is that Trump is no neophyte when it comes to debt and interest rates. Going back to his 1987 book “The Art of the Deal,” in which he highlights debt as an important part of his winning strategy, Trump has been known for his savvy in the debt markets. He even dubbed himself the “king of debt” in his 2016 election campaign. The positive spin on this is that President Trump will likely be quite sensitive to how bond traders and yields react to his policies.

So where does that leave us in terms of planning for 2025. Well, if you have been following me on this, both stocks and bonds have locked in their bets for what to expect in the year ahead. For stocks, its positive for most sectors with some standouts. For bonds its high anxiety and yields in a trading range at least around these levels for some time. The market has all of this factored in. What’s the downside risk? The downside risk comes if policy is more extreme or materially different than what has already been vetted. Knowing that Trump will want to avoid the potential pain of markets rejecting his policies, he is likely to surprise on the upside. We will just have to wait and see what is in the pile of executive orders that show up on the Resolute Desk come January 21^st.

Ok, so that is Guy #1 down. What about Guy #2? He is, of course, Jerome Powell, the Chairman of the Federal Reserve. Good news—for now—he is not likely to do anything, or even say anything extreme, for at least a few months. Futures give a 25 basis-point cut a good chance of occurring in the spring with another potential 25 basis point cut next fall. There is around a 20% chance that we will only get one cut by this time next year. That stinks if you are one of those folks who is obsessed with low short-term yields, or you are a real estate developer. With a low probability of recession, elevated inflation expectations, and relatively tame unemployment, the Fed is likely to stick to the program. In the coming two weeks, we will get a flurry of economic numbers which include monthly employment situation and inflation numbers; these can, in an extreme, alter the course of the markets. Beyond those, at a higher level, downside risks are concentrated around potential inflation spikes. That would have painful implications for what is left of the bull market energy that powered 2024’s gains.

That brings us, finally, to the companies behind the stocks, themselves. In just under two weeks, JPMorgan Chase will ring in the first earnings season of 2025, which will include calendar Q4 of 2024. Regardless of Guys #1 and #2, these can really set the tone for the next few months of market returns. Of course, two weeks or so after that, Guy #2 will take the spotlight in January’s FOMC meeting. And you know Guy #1 is not just going to sit idle once he gets his new, old keys to the White House. Have I awoken you from your holiday haze yet?

For the next six months, there is not likely to be a new course set for the markets, only course corrections. Course corrections will be based on ACTUAL policy from the incoming administration, the new red congress, and from the very tired Fed. Companies, themselves, will have a chance to shine… or not. We still have two full trading days this week. You may be exhausted from all the merry makings of the past two weeks, after a year of crazy market moves, but now is not the time to rest. Come on, sharpen that pencil. Opportunity awaits!

TUESDAY’S MARKETS

Stocks could not hold onto gains in the 2024’s final trading day, but stocks still closed solidly in the green for the year, marking a second straight year of extraordinary returns. Bond performance for the year left bond traders wanting and jealous of randy stock traders, but yield-hungry investors had a year of unrivaled, decadent yields.

NEXT UP

• Initial Jobless Claims (December 28^th) is expected to come in at 221k, slightly above last week’s 219k claims.
• Continuing Claims (December 21^st) may have eased to 1.98 million from 1.91 million.
• S&P Global US Manufacturing PMI (December) will probably come in at 48.3, in line with the earlier flash estimate.

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