The Bull Thread

The Economic Outlook Looks Pretty Good – Part 1


Amidst all the election news, the Federal Reserve’s (Fed) November meeting almost went under the radar. The good news is that the Fed didn’t give us any surprises. As widely expected, they cut the federal funds rate by another 0.25%-points, taking it down to the 4.5-4.75% range. Fed Chair Powell pointed out that this is simply ongoing recalibration of interest rate policy – policy is still restrictive even as inflation continues to move to their target of 2%. The labor market has cooled off quite a bit, but they don’t want to see any more softening. They believe the employment situation is solid and want to keep it that way. All of which is very positive.

At the same time, they’re in no hurry to “normalize” policy. They’re going to take a gradual approach as more data comes in, i.e. no big moves like the 0.50%-point cut in September. Economic growth is solid, as recent data has highlighted. Quoting Powell:

If you look at the U.S. economy, its performance has been very good. And that’s what we hear from businesspeople, and expectation that that will continue. If anything, people feel next year—I’ve heard this from several people—that next year could even be stronger than this year.

This is a telling outlook and worth unpacking as we look toward 2025. Real GDP growth has clocked in at an annualized pace of 2.9% over the last two years (through Q3). That’s above the 2017-2019 pace of 2.8%. There’re questions about whether the Fed should even be easing under this scenario, but as Skanda Amarnath pointed out when Ryan and I spoke to him on our recent Facts vs Feelings podcast episode, the Fed does not have a GDP target. They have an inflation target and maximum employment mandate.

Note that Powell was quick to add that they haven’t accounted for any impact of the new administration’s proposed policies. We’re not quite sure what policies will actually be passed, and to what extent. It’s going to take some time for things to come into focus, and even more time for it all to play out. Given that uncertainty, I thought it would be useful to do a SWOT analysis for the US economy in 2025, i.e. considering its strength, weaknesses, opportunities, and threats. In this piece, I’ll cover strengths and weaknesses. I’ll save the discussion of potential opportunities and threats in part 2 of this blog.



Strengths
To start with, it’s useful to recall that consumption accounts for just under 70% of the economy. Consumption has been driven by income growth this cycle, and right now aggregate income growth (across all workers in the economy) is running at a 5.3% year-over-year pace. That’s above the strong pre-pandemic pace of 4.5%. There’s no reason to expect this to pull back significantly, but we may see a shift in dynamics. Aggregate income growth is the sum of employment growth, wage growth, and change in hours worked. Going forward, aggregate income growth is more likely to be powered by strong wage growth, even as employment growth slows to a 150,000-175,000 average monthly pace.



Household balance sheets are also in really good shape. Household net worth is 785% of disposable income, close to all-time records. Mostly thanks to rising home prices and stock prices. Even if income growth pulls back further, strong balance sheets give households room to maintain consumption (by reducing the amount they save each month).



Productivity growth is also running strong – over the last six quarters, productivity growth has clocked in at a 2.6% annualized pace. That’s well above the 1.6% annual pace we saw between 2005 and 2019. This productivity boost is something we talked about a year ago, including in our 2024 outlook. As we discussed back then, a key factor here is a strong labor market. Workers who were hired back in 2021 and 2022 have gotten a lot more productive as they got trained and stay in their jobs (with relatively higher pay). Entrepreneurship is another likely factor boosting productivity, with new business formations running well ahead of what we saw in the last decade. New business creation also provides employees opportunities to switch jobs for higher pay. The good news is that strong productivity gains allow wage growth to remain strong, without creating inflationary pressures – this dynamic has been playing out over the past year and half and we expect it to continue into 2025.



The main risk to this productivity boom is a recession, which can really harm the labor market. However, we don’t think that’s on the cards for 2025. Our own proprietary leading economic indicator has consistently said that the US economy is not close to a recession for over two years now (including in 2022 and 2023, when everyone was calling for one). It continues to tell us that the US economy is growing on trend, or slightly above it. Moreover, the Fed has pointed out that they don’t want the employment situation to soften any further. That’s crucial support.



Weaknesses
Interest rates have risen sharply since the Fed meeting in September, despite rate cuts. The 10-year treasury yield jumped from 3.64% on September 17th (the day prior to the Fed’s September meeting) to 4.33% as of November 7th. We did see a big jump on the day after the election, but yields pulled back the following day. These are big moves, but for the most part it reflects lower recession fears thanks to strong economic data in recent weeks.



Normally I’d put higher interest rates as a “Threat” but it’s already hurting and causing weakness in certain sectors of the economy. For one thing, higher interest rates can adversely impact investment spending that is dependent on borrowing, and we’re already seeing signs of that. Business equipment spending has picked up over the last two quarters, coinciding with a big drop in interest rates. However, with rates reverting higher now, there’s some risk that equipment investment flatlines (as it did in 2023). Investment in structures has boomed over the last couple of years, but this has been driven by the CHIPS Act and IRA (Inflation Reduction Act) crowding in investments in manufacturing structures, specifically high-tech manufacturing. However, investment in structures outside of manufacturing has been weak. This is unlikely to rebound unless interest rates ease.

High interest rates also hinder consumers from tapping into credit, such as auto loans or even home equity that’s built up over the last few years. Overall consumer credit growth is running at just over 2% year-over-year, well below the 4.5-5% pace we saw back in 2019.

The weakest area of the economy is housing, which is a critical cyclical sector of the economy. And no surprise, it’s highly dependent on interest rates. 30-year mortgage rates closely track 10-year treasury yields, and they’re back over 7% now. That’s not conducive for housing activity. Both single-family and multi-family segments are getting hit. Completions are running 25% above starts, which indicates that builders are not confident about the outlook and are more focused on just completing homes already in the pipeline. Instead of starting new ones.



Housing by itself may not be pull the economy into a recession, but it’s a drag. Residential investment has already dragged from GDP growth for two quarters in a row. This is likely to continue into the beginning of 2025, unless mortgage rates pull back. Construction employment has been running solid until now, but if housing remains weak, we could see that start to pull back as well. Historically, construction employment has foreshadowed further weakness across the labor market. This is something we’re going to be watching very carefully over the next few months.

Overall, I think it’s fair to say the strengths currently outweigh the weaknesses, especially because the latter are isolated in smaller areas of the economy. Still, it’s something to be aware of as we move into next year. In my next piece, I’ll discuss potential opportunities and threats for the 2025 macroeconomic outlook.

 

The Other Thing That Happened Last Week


“No.” -Federal Reserve (Fed) Chairman Jerome Powell when asked if he would resign if President-elect Trump asked him to.

Yes, the election and huge stock market rally took all the headlines last week, but there was another very big event. The Fed cut interest rates again, by 0.25% (after the 0.50% cut in September) to a range of 4.5%–4.75%.

This was universally expected and overall the statement was virtually the same as last time, so there wasn’t much of a curveball from this decision. Still the door is wide open for another cut in December and we think multiple cuts in 2025.

Powell and Trump Probably Don’t Like Each Other
The bigger question though was just how much Powell and Trump don’t like each other. It was a contentious relationship the last time Trump was in the White House and given Powell’s rather curt answer last week (in the quote above) it is safe to say they might not be sending holiday cards this year either. But the press conference didn’t stop there, as a reporter asked if the President could demote or fire him. “Not permitted under the law,” Powell fired back. “Not what?” the reporter responded. “Not permitted under the law,” said Powell, a lawyer himself, this time pausing for emphasis after each word.

Sonu Varghese, VP Global Macro Strategist, wrote some about the Fed last week in The Economic Outlook Looks Pretty Good – Part 1. This week I’ll take a look at a few other things with the Fed that you might find interesting.

Let’s Talk About Fed Cuts
First off, they cut on a Thursday due to the election. You have to go back to October 1998 and then July 1995 the time before for the last time they cut on a Thursday, as most meetings conclude on a Wednesday. 1998’s cut was an intra-meeting cut due to Long-Term Capital Management (LTCM) going under. 1995 was a normal meeting, but that was back when the Fed would cut and no one would even know about it until the next day.

Last week the Fed cut interest rates with stocks near all-time highs. Here’s a chart we’ve shared many times before, but it is just as relevant now as it was then. We found 20 other times (back to 1980) the Fed cut with the S&P 500 within two percent of an all-time high and stocks were higher a year later 20 times and up an average of nearly 14%. As much as the Fed was a headwind in 2022 when they aggressively hiked to slow inflation, it has been a tailwind since July 2023 when they stopped hiking. Now, as this easing cycle continues, the tailwinds remain strong.



Why We Aren’t Worried About Higher Inflation
We’ve been on record for well over a year now that our country would see very strong productivity and that is exactly what has played out. Below is what Sonu had to say recently about productivity.

Productivity growth is also running strong – over the last six quarters, productivity growth has clocked in at a 2.6% annualized pace. That’s well above the 1.6% annual pace we saw between 2005 and 2019. This productivity boost is something we talked about a year ago, including in our 2024 outlook. As we discussed back then, a key factor here is a strong labor market. Workers who were hired back in 2021 and 2022 have gotten a lot more productive as they got trained and stay in their jobs (with relatively higher pay). Entrepreneurship is another likely factor boosting productivity, with new business formations running well ahead of what we saw in the last decade. New business creation also provides employees opportunities to switch jobs for higher pay. The good news is that strong productivity gains allow wage growth to remain strong, without creating inflationary pressures — this dynamic has been playing out over the past year and half and we expect it to continue into 2025.

The reality is some of the best years for the economy and stock market have been during periods of strong productivity, which makes sense since productivity growth is a key input to GDP. Last year for instance saw nominal Gross Domestic Product (GDP) up nearly 6% and we are now looking at back-to-back 20% years for the S&P 500, something we don’t think is a coincidence with productivity strong. The last time we saw an extended period of strong productivity? The mid to late1990s, one of the best periods ever for investors.

We hear all the time that should the Fed cut here, it could lead to higher inflation. Yes, that’s a worry, but again go look back at history. When you have higher productivity it allows for higher wages, but also puts a cap on inflation. It sounds like a perfect scenario, but we indeed saw a similar situation in the mid-1990s and the Fed cut, wages stayed strong, and inflation wasn’t an issue. As long as productivity remains strong (like we think it should) the path is there for the Fed to continue to cut interest rates and not worry about inflation soaring back.

 

November Monthly Option Expiration Day: Russell 2000 Best

Russell 2000 (the small-cap index) has been up 16 of the last 21 years on November’s monthly option expiration Friday with an average gain of 0.48% in all years. Since 2012 Russell 2000 has been even more consistent, up 13 of 14. DJIA has been second best on November’s monthly option expiration Friday with an average gain of 0.42% and up 15 of the last 21 years. It is not a mistake that DJIA’s November monthly op-ex day has the same point change and percent change in 2014 and 2015. It was triple checked and it’s correct.

Full-week performance has been historically weaker. Average performance for the week is negative across the board with losses ranging from –0.32% by Russell 2000 to –0.18% from DJIA. Week after performance has been better, with NASDAQ and Russell 2000 strongest.

 

The Economic Outlook Looks Pretty Good, and Opportunities Abound – Part 2


“We have two kinds of forecasters, the ones who don’t know and the ones who don’t know they don’t know” – John Kenneth Galbraith

In Part 1 of this blog, I discussed a framework for thinking about the economic outlook in 2025. There’s clearly a lot of policy uncertainty ahead. As the incoming Trump administration and Congress fully work out the details. It’s going to take time for it all to play out, and it would be foolhardy to predict what’s coming down the pike, let alone predict the precise impact. That said, even before we start thinking of what may be coming ahead, it’s useful to take stock of where we are right now. I used a SWOT analysis (strengths, weaknesses, opportunities, and threats) to assess the economy as it stands today (strengths and weaknesses) and external factors that could impact it going forward (opportunities and threats). This allows us to think about the odds of each of these factors, and position portfolios accordingly.

To recap Part 1: The economy is on solid footing right now — thanks to strong income growth, solid household balance sheets, and productivity growth. That does not mean there are no potential risks. Elevated interest rates, even in the face of Federal Reserve cuts, are a big risk to the economy. Higher rates are a function of stronger growth expectations, but it’s hurting sectors like housing, manufacturing, and investment spending. Loan demand is also weak due to elevated rates.

In terms of external forces, we have potential monetary and fiscal policy opportunities that could provide a steady tailwind for markets and the economy. At the same time, threats that could upend the outlook include tariffs and resurgent inflation. Let’s walk through all of these.



Opportunities – Don’t Fight the Fed, or Congress
There’re questions about whether the Fed should even be easing rates when GDP growth is running at 2.5–3.0%. However, as I wrote in the previous blog, the Fed does not have a GDP target. They have an inflation target and a maximum employment mandate. The inflation outlook looks good going into 2025. Headline inflation, as measured by the Fed’s preferred personal consumption expenditure (PCE) metric, is running at a 2.1% year over year (the lowest since February 2021), and is up just 1.8% annualized over the past three months.



The Fed does focus on core inflation (excluding food and energy), but it’s good to recall they actually target headline inflation. To that end, oil prices remaining around $70/barrel (WTI) is a big positive — it’s hard to worry about inflation when energy prices are muted. It matters even for core inflation, since energy feeds into items like restaurant prices and airfares. On the core inflation front, most of the excess inflation (above the Fed’s 2% target) is coming from lagging shelter data. The good news is there’s likely more shelter disinflation coming through in 2025. The relatively benign inflation picture will allow the Fed to focus on the employment side of their mandate. Even after their November meeting, Powell noted that the labor market is solid, but they don’t want it to cool further. In other words, they’re putting a cap on the unemployment rate (or a floor under the economy), to the degree that it’s under their control. This implies policy is likely biased towards the dovish side in 2025, and that’s a big positive. Markets are currently pricing in another 0.75%-points of cuts through 2025.

Fiscal policy could provide another tailwind in 2025. The 2017 Tax Cut and Jobs Act (TCJA) had several provisions that “sunset” at the end of 2025, mostly on the individual side but also a few on the business side. But the odds of the economy going over a fiscal cliff from automatic tax increases on January 1, 2026, has been reduced close to zero amid Republicans capturing all three branches of government. There’s a good chance that most, if not all, of the expiring provisions will be renewed, and then some. The corporate tax rate, which was permanently reduced from 35% to 21% in 2017, may be further reduced to 15%, which would boost S&P 500 earnings per share (EPS) by about 4%.

Now, there is caution warranted given the slim 4- to 5-seat majority Republicans will have in the House, the narrowest Republican majority ever. Even in 2017, writing a tax bill took the better part of a year despite Republicans commanding a 20-25 seat majority in the House. The narrow house majority this time around, combined with a 53-47 majority in the Senate, means that serious spending cuts are not going to be on the table (as in 2017). Keep in mind that if defense, Medicare, and Social Security are off the table, it’s going to be hard to find serious savings. The path of least resistance will likely be more deficit spending. The only question is, How much? Republicans in Congress will actually have to settle on a deficit number before proceeding to write the tax bills. Note that permanent renewal of all expiring provisions of TCJA could cost up to $4 trillion. There are also some big differences between now and 2017: deficits are already high and the government’s interest costs are much higher too (thanks to higher rates).

From a market perspective, deficits are not a bad thing as it can potentially boost corporate profits, assuming it doesn’t crowd out consumer spending or private sector investment. And profits are what matter for stocks. At the national aggregate level, corporate profits are the result of net saving versus consumption (the opposite of savings) by the four major sectors of the economy: households, businesses, government, and the rest of the world (via trade). Rising household savings and rising government savings (budget surpluses) drag from profits, and vice versa. More business investment and dividends paid out add to profits. A rising current account surplus means the rest of the world is buying more US-made goods and services than Americans buy from foreigners, and that increases business revenues and profits, whereas an expanding current account deficit (which is typically what the US has) means Americans buy relatively more from abroad, and that’s a drag on profits. Note that this aggregate picture doesn’t tell us which companies are growing profits, or how it’s distributed across industries.

Profit growth surged over the 2016-2019 period on the back of higher fiscal deficits (from TCJA). Even over the last six quarters, households have started saving more (relatively) but corporate profits rose because fiscal deficits started growing again.



Another potential positive is deregulation, though it’s always hard to pinpoint precisely how this impacts markets. An easier stance from agencies like the SEC, FTC, CFTC, and even Department of Justice, could lead to a rise in “animal spirits,” likely manifesting in things like increased M&A activity and IPOs (which have fallen a lot over the last two years, partly due to higher rates depressing valuations). Deregulation could see more supply-side activity, including in areas like energy production. That will also be positive for the inflation outlook.

Tariffs and Potential Inflation Resurgence Pose a Threat
The threat of tariffs, and a retaliatory trade war, is clearly on everyone’s mind. All else equal, tariffs will raise the price of imported goods (though it’s a one-time price level increase). But things don’t work as neatly as that. For one thing, it’s hard to predict what tariffs will actually be implemented, let alone their impact. The Biden administration kept in place most of Trump’s tariffs from his first go-around, and even implemented a few more. President-elect Trump has discussed implementing 60% tariffs on Chinese goods and up to 20% tariffs on other imports. It’s highly unlikely we see anything close to this. For one thing, the market reaction would be extremely negative, perhaps prompting a tempering of any extreme proposals. More targeted tariffs are the likely reality.

Also, bilateral tariffs may simply shift trade to other countries. The share of U.S. imports coming from China is now just 14%, versus 22% in 2018. Yet, the share of imports from countries like Mexico, Canada, and Vietnam has risen. In fact, the overall non-petroleum goods deficit rose by 14% between 2018 and 2019, thanks to surging goods imports. Another factor here is the dollar. The dollar appreciated soon after Trump’s 2016 election, but then pulled back in 2017 as the focus shifted from tariffs to tax cuts. But it resumed its increase in 2018-2019, making imports cheaper even as the trade war was raging. The dollar has appreciated by about 5% since September 2024, thanks to expectations of stronger economic growth (and higher rates) in the US relative to other countries. But part of this dollar surge occurred post-election. A stronger dollar could offset some of the price increases associated with tariffs.



All in all, we’re skeptical about an inflation surge in 2025 on the back of tariffs. As I noted above, there are disinflationary trends in the pipeline that will likely keep a lid on inflation in 2025 (including shelter). If anything, a potentially higher probability inflation threat remains an unexpected energy price shock (like in 2022) arising from major disruptions in the Middle East. Still, the absolute odds of this are relatively low. Strong oil production increases in the US and Canada will help mitigate this (keeping supply strong), along with continued weakness in China (keeping a lid on demand).

Overall, economic strengths clearly outweigh areas of weakness, and the opportunities likely have a higher probability of coming to fruition than the threats. The balance favors continued strength for equities, which is why we’re maintaining our overweight to stocks, especially US stocks. Equities do have strong momentum going into 2025, but it may not be smooth sailing while Congress and the new administration fully work out policy changes. Combine this with potential risks on the horizon, and we see good reason to maintain a robust array of diversifiers in our portfolios, including bonds, gold, and managed futures.

 

Why We Think Inflation Has Normalized and the Fed Can Cut Rates


The October Consumer Price Index (CPI) data held no surprises for markets, either to the downside or the upside. Since inflation had already normalized, that means the latest data confirms the pre-existing trend. Headline CPI rose 0.2% in October and is up 2.6% year over year. Core CPI (excluding food and energy), which is typically used as a gauge for underlying inflationary pressure by the Federal Reserve (Fed), rose 0.3% last month and is up 3.3% since last year.

It probably sounds bonkers to say inflation has normalized when these numbers are clearly above the Fed’s target of 2%. The thing is, almost all of the “excess” inflation is coming from shelter inflation. If you take out shelter inflation, which makes up about 35% of the CPI basket, headline CPI is up just 1.3% year over year. Even over the last three months, CPI ex shelter is running at an annualized pace of 1.3% versus 2.5% for overall CPI.



You may be thinking, “Wait! Housing is in fact a big portion of a household’s budget. You can’t just throw it out.” That is true, except the heat in shelter inflation actually comes from rent increases we saw in 2021, when rents surged. As Ryan and I have discussed over the last two years, official shelter data has significant lags to what we see in the private market real-time data. Private data (via Apartment List) indicates that rental inflation has slowed significantly, and new rental lease prices have been falling for over a year now. Our friends at WisdomTree have done one better, re-constructing CPI, but with more real-time housing price data. This is from their data:

• Headline CPI with real-time shelter is up 1.3% year over year versus 2.6% for CPI with official shelter data.
• Core CPI with real-time shelter is up 1.8% year over year versus 3.3% for core CPI with official shelter data.

Jeremy Schwartz, the Global Chief Investment Officer at WisdomTree, put it succinctly: “The Fed should continue recalibrating to neutral.” I couldn’t agree more.

The good news is that the Powell-led Fed seems inclined to do so as well. There’s been a question about whether the Fed should be cutting when economic growth and the stock market are running strong. But the Fed does not have a GDP mandate. Nor do they have a stock market mandate. As Ryan pointed out in his last blog, the Fed has historically cut with stocks near all-time highs (and stocks were higher 20 out of 20 such times a year later, with an average return of 14%). The Fed has a stable inflation mandate, and a maximum employment mandate. It’s pretty clear the former goal has been met. But there’s some risk to the latter, which the Fed seems thankfully aware of. As Powell said after the most recent Fed meeting in November:

“The labor market has cooled a great deal from its overheated state of two years ago and is now essentially in balance. It is continuing to cool, albeit at a modest rate, and we don’t need further cooling, we don’t think, to achieve our inflation mandate.”

In short, the Fed doesn’t want the labor market to get weaker. Their most recent unemployment rate projections (from the September meeting) confirm this – they projected the 2024 and 2025 unemployment rate to remain steady at 4.4% (it’s currently at 4.1%). As I wrote back then, the Fed is essentially putting a cap on the unemployment rate, or rather, a floor under the economy. Crucially, the fact that inflation has normalized is what allows them to do this. There’s good reason to think this dynamic will play out in 2025 as well, with shelter disinflation in the pipeline and continuing to put downward pressure on overall inflation.

To Powell’s point, the labor market does not need to cool further for them to achieve their inflation mandate. And it had cooled quite a bit, as Neil Dutta at Renaissance Macro Research points out. A good place to see this is in wage growth. The latest Employment Cost Index data for private sector service industry workers showed wages growing 3.6% since last year but slowing to a 2.7% annualized pace in Q3. This metric is historically correlated with services inflation, and it looks like there’s further moderation ahead.



This is further confirmation that the inflation problem is over, and the Fed can normalize interest rates (and should do so). Elevated rates are clearly having a negative impact on rate-sensitive segments of the economy, especially housing. The Fed’s latest survey of bank loan officers also showed much weaker demand for loans in Q3, despite a pullback in the net number of banks tightening standards. The net percent of banks reporting stronger demand for commercial and industrial loans pulled back from 0% to -21% for large and middle-market firms, and from 0% to -19% for small firms. This is not what you want to see if investment spending is to pick up.



Long story short, policy is too tight. But the Fed has a lot of room to cut because inflation has normalized, and the inflation outlook looks good as well.

What’s interesting is that markets are now more hawkish than the median Fed member. Markets currently expect the policy rate to land around 3.9% at the end of 2025, implying just 2-3 more rate cuts. Fed members estimated the 2025 rate at 3.4% in their September projections. Looking further out into 2029, markets expect the policy rate to remain close to 4%. That’s well above the Fed’s long-run estimate of just 2.9%. At some point these divergent views will have to reconcile, and it may take investors becoming a tad less optimistic about future growth and perhaps Fed members becoming a tad more optimistic.

 

Week before Thanksgiving DJIA Up 20 of 31, But Down 6 of last 7

DJIA has a fair track record over the last 31 years, rising 20 times the week before Thanksgiving with an average gain of 0.44% in all years. But the other major U.S. stock market benchmarks are not as strong and there has been more weakness the past seven years. Since 2017, DJIA has advanced just once during the week before Thanksgiving.

Over the last 31 years, S&P 500 and NASDAQ have the same record, up 18 times, with similar average gains of 0.20% and 0.23% respectively. Russell 2000 has been the weakest, up 16 times with an average gain of 0.08%. Last year, the week before Thanksgiving, enjoyed solid across-the-board gains as the market recovered from a correction.

Should weakness materialize next week, it may be a solid set up for the Thanksgiving trade of buying into weakness the week before Thanksgiving and selling into strength around the holiday and/or during typical November end-of-month strength.

 

Homebuilders Present vs. the Future
Mon, Nov 18, 2024

This morning the National Association of Home Builders published their latest update on home builder sentiment. The headline index rose to 46 versus an expected decline from 43 to 42. That three-point jump marks the largest one-month uptick since March but only leaves it in the middle of its range from the past couple of years.



Of the sub-indices, future sales stood out the most. The index surged 7 points month over month to reach the most elevated reading since April 2022. That is just above the historical median and suggests homebuilders are optimistic in spite of weaker readings in traffic and present sale indices.



As noted, present sales and traffic were not as rosy as future sales. As shown below, present sales were higher in November rising 2 points month-over-month to 49. However, that is only in the 29th percentile of historical readings, and more recently that is well within the range of readings from the past couple of years.



With present and future sales moving in the opposite direction, a massive divergence has formed between the two. As shown below, for most of the survey's history, future sales have tended to be higher than present sales for sustained periods albeit with some exceptions like the first couple of years of the pandemic. The last time present sales were stronger than future sales (negative readings in the chart below) was just five months ago, but there has been a massive turnaround since then. With November's reading, the spread is at the highest level (meaning sentiment towards future sales is stronger than present sales) since December 2006. Late 1991 was the only other time in which there was as wide of a divergence between the two.



Not only has there been a divergence between present and future sales, but the report also showed some divergence in sentiment based on geography. As shown below, homebuilder sentiment has perked up in the Northeast and the Midwest. Conversely, sentiment was lower month over month and closer to the low ends of recent ranges in the South and West.



As for homebuilder stocks, the long-term uptrend remains in place albeit the chart isn't as constructive as it once was. In late October, the iShares US Home Construction ETF (ITB) fell back below its 50-DMA for the first time since late spring and early summer when there was a successful test of support at the longer-term 200-DMA. While there hasn't been any sort of similar drawdown to support this go around, one week ago there was a failed attempt to move back above the 50-DMA. That leaves the group in no-man's-land sandwiched between the two moving averages.

 

Feast On Small Caps Thanksgiving to Santa Claus Rally Trade

Thanksgiving kicks off a run of solid bullish seasonal patterns. November-January is the year’s best consecutive 3-month span (2025 STA p 149). Then there’s the January Effect (2025 STA p 112 & 114) of small caps outperforming large caps in January, which begins in mid-December.

And of course, the “Santa Claus Rally,” (2025 STA p 118) invented and named by Yale Hirsch in 1972 in the Almanac. Often confused with any Q4 rally, it is defined as the short, sweet rally that covers the last 5 trading days of the year and the first two trading days of the New Year. Yale also coined the phrase: “If Santa Claus should fail to call, bears may come to Broad and Wall.”

We have combined these seasonal occurrences into a single trade: Buy the Tuesday before Thanksgiving and hold until the 2nd trading day of the New Year. Since 1950, S&P 500 has been up 79.73% of the time from the Tuesday before Thanksgiving to the 2nd trading day of the year with an average gain of 2.58%. Russell 2000 is up 77.78% of the time since 1979, average gain 3.34%.

 

Why We Aren’t Permabulls


“Oh, those Carson guys are just permabulls.” Institutional CIO who has been dead wrong for years

Are we permabulls? We get this question sometimes and it is a great question. (A permabull is someone who remains bullish on markets no matter what is happening.)

On the surface we know that stocks usually go up, so maybe we should always lean bullishly? When it comes to my investments and retirement accounts, I do take this approach. I don’t care what the headlines are, I’m still going to put money into my 401k every two weeks. Then we look at a chart like this and it makes you think it might pay to have a glass half full approach to life.



It is no secret that the Carson Investment Research team took the road less travelled two years ago and went on record that a new bull market was starting and there wouldn’t be a recession. This call was absolutely hated by so many. I’ll never understand why, but most were hoping for a recession and bear market and for us to be one of the very few places to go against the herd of institutional investors (who all think the same) wasn’t well received.

We were mocked on social media, laughed at in public forums for saying 2023 was going to be a good year, shunned from going on TV for being ‘reckless’, and more. Here’s the thing. Yes, in bull markets with the current backdrop we are bulls. When we start to see signs of technical deterioration, stress in the credit markets, and signs the economy is indeed breaking down, we will change our tune. We’ve been overweight equities since December 2022 and we remain there today.

So no, we aren’t permabulls. But we are completely dedicated to helping clients reach their financial goals, even if that means going against what’s fashionable. And we definitely were not running around for two years telling people to be overweight bonds relative to stocks like so many of the big institutional shops have been.

Why do we remain bullish here and now? For starters, this bull market is actually quite young, at just over two years old. As you can see here, the average bull market lasts more than five years, suggesting this bull market might indeed last a lot longer than the bearish CIO would think.



Did you hear we had an election recently? Yeah, you probably heard, but what you might not have heard was that years one and two of a president who was re-elected tend to do quite well and better than under a new president. In fact, the four years under President Biden played out quite well to script. Year one does well, then year two (the midterm year) is weak, followed by a strong final two years. No, we don’t say you should invest simply on the presidential cycle, but we sure wouldn’t ignore it either.



What drives long-term stock gains? It is earnings and when you have an economy that continues to surprise to the upside, you tend to have solid earnings. For more of our thoughts on why the economy continues to look pretty good, be sure to read what Sonu Varghese, VP Global Macro Strategist, wrote in The Economic Outlook Looks Pretty Good – Part 1 and Part 2.

Turning to forward 12-month S&P 500 earnings we once again see new highs, all the way up to $268, up from $225 in early 2023. There is no holy grail when it comes to investing, but when we saw earnings estimates making hew highs, we took it as a big reason to be overweight equities and still do.



It doesn’t stop there though, as profit margins continue to trend higher and are at their highest levels this cycle. Profit margins expanding and earnings hitting all-time highs are great dual tailwinds for higher stock prices.



The S&P 500 is looking at potential back-to-back years with a gain of over 20% for the first time since the late 1990s, so we need to be aware it’ll likely be tough to see that impressive feat for a third year in a row. Then again, here’s a tweet I did on consecutive 20% years. If investors have 99 problems, up 20% two years in a row shouldn’t be one of them.



We continue to think low double-digit returns next year is possible (so better than your average year), but one thing to be aware of is the third year of a new bull market tends to be a catch-your-breath year. This makes sense, as years one and two of a new bull market are very strong, so some consolidation would be perfectly normal. The good news is once a bull market gets to year four, the returns once again are very strong.



When I started at Carson back in July 2022, I wanted to be part of one of the most honest and trustworthy research shops out there. We won’t always be right, but we sure won’t always be wrong is how I like to say it. The calls that our team has made the past few years have been about as good as anyone else out there. We are honored to help so many of our Partners grow and to shed some light on what it really happening, without following the crowd and saying the same thing as everyone else.

No we aren’t ‘just permabulls’ around here and trust me, we will change our tune when the data tells us to. Where am I a true permabull? I’m a permabull in believing that if you treat people the right way, work hard, stay humble, and surround yourself with good people that good things will happen.

 

Russell 2000 on Verge of Breaking Out

It has been over three years since the Russell 2000 last closed at an all-time high. This sad streak could be coming to an end soon. Seasonally speaking, small caps are set up for their annual yearend rally into Q1, often referred to as the “January Effect,” where small caps outperform large caps in January. As we point out on pages 112 and 114 of the Almanac, most of the “January Effect’s” small cap outperformance takes place in the last half of December as tax-loss selling abates.

As you can see in the accompanying chart, the Russell 2000 has been tracking the pattern fairly well since August and it looks like the small fry may finally be on the verge of breaking out to new all-time highs. Small caps leapt higher in early November, then retreated a bit and are now surging higher now. This trend aligns well with the annual pattern above. But as illustrated in the chart, small caps can exhibit some choppy trading from late-October through mid-December and patience has generally been rewarded with opportunities presenting through mid-December.

 

Thankful Investors -- Last 5 Years
Mon, Nov 25, 2024

It's a holiday-shortened Thanksgiving week, so over the next few days we plan on writing about some of the stocks that investors can be most thankful for. In this post we're highlighting the 25 best performing stocks in the S&P 1500 on a total return basis over the last five years. In the table below we rank them from 1st to 25th and show how much a $1,000 investment in each stock five years ago (on 11/25/19) would be worth today. Below the table we provide a one sentence blurb generated by AI that describes what each company does.

At the top of the list above even NVIDIA (NVDA) is Alpha Metallurgical (AMR), which mines and produces coal for steel production and power generation! A $1,000 investment in AMR five years ago would be worth more than $34,000 today!

NVDA ranks second, turning $1,000 five years ago into more than $25,000 today, followed by energy drink maker Celsius (CELH), MARA Holdings (MARA), and GameStop (GME). Other notables on the list of big winners over the last five years include Tesla (TSLA) at #7, Super Micro (SMCI) at #8, Abercrombie & Fitch (ANF) at #12, and Axon Enterprise (AXON) at #14. You'll also probably recognize companies like Arista Networks (ANET), elf Beauty (ELF), Sprouts Farmers Market (SFM), Vistra (VST), Deckers Outdoor (DECK), Builders FirstSource (BLDR), and Eli Lilly (LLY).



For a quick description of each company listed above, we asked AI to give us its best one-sentence blurb:

• Abercrombie & Fitch (ANF): A global specialty retailer focused on casual apparel and accessories for young adults and kids, known for its trendy fashion and lifestyle branding.
  
• Alpha Metallurgical Resources (AMR): A leading producer of metallurgical coal, used primarily in steel production, with operations focused on mining and processing high-quality coal.
  
• Antero Resources (AR): An independent energy company specializing in the exploration and production of natural gas, natural gas liquids (NGLs), and oil in the Appalachian Basin.
  
• Arista Networks (ANET): Provides cloud networking solutions, including switches, routers, and software, for data centers and enterprise networking environments.
  
• Axon Enterprise (AXON): Known for its Taser devices, body-worn cameras, and cloud-based evidence management software, serving public safety and law enforcement agencies.
  
• Builders FirstSource (BLDR): Supplies building materials, manufactured components, and construction services to professional homebuilders and remodelers in the U.S.
  
• Celsius Holdings (CELH): A beverage company offering fitness-oriented energy drinks and health-focused functional beverages for active consumers.
  
• Comfort Systems USA (FIX): Provides mechanical services such as heating, ventilation, air conditioning (HVAC), and electrical contracting to commercial and industrial customers.
  
• CONSOL Energy (CEIX): A coal and energy company producing high-quality bituminous coal for electricity generation and industrial applications.
  
• Deckers Outdoor Corporation (DECK): Designs and markets footwear and accessories under brands like UGG, Teva, and HOKA ONE ONE, targeting performance and lifestyle consumers.
  
• e.l.f. Beauty (ELF): A cosmetics company specializing in affordable, high-quality makeup and skincare products available globally.
  
• Eli Lilly (LLY): A leading pharmaceutical company developing innovative medicines in areas such as diabetes, oncology, immunology, and neuroscience.
  
• GameStop (GME): A retailer of video games, consumer electronics, and collectibles, with a focus on digital gaming and e-commerce.
  
• Marathon Digital Holdings (MARA): A digital asset technology company focused on cryptocurrency mining, particularly Bitcoin, leveraging blockchain technology.
  
• Mr. Cooper Group (COOP): A mortgage servicer and lender offering home loan solutions, refinancing, and servicing for homeowners and buyers.
  
• NVIDIA (NVDA): A technology company best known for its graphics processing units (GPUs) used in gaming, AI, data centers, and autonomous vehicles.
  
• Powell Industries (POWL): Manufactures electrical equipment and systems for the management and distribution of electricity in industrial and utility markets.
  
• Quanta Services (PWR): Provides infrastructure services to the energy and communications sectors, including construction and maintenance of electric power and telecom systems.
  
• Range Resources (RRC): An independent oil and natural gas company focused on exploration and production in the Appalachian Basin, particularly natural gas.
  
• SiTime Corporation (SITM): Designs and manufactures precision timing devices, including silicon MEMS-based oscillators, used in electronics.
  
• Sprouts Farmers Market (SFM): A grocery retailer emphasizing fresh, natural, and organic products, catering to health-conscious consumers.
  
• Super Micro Computer (SMCI): Develops high-performance, energy-efficient server and storage solutions for data centers, enterprise IT, and cloud computing.
  
• Tesla, Inc. (TSLA): A global leader in electric vehicles, renewable energy products, and battery technology, with a mission to accelerate the world's transition to sustainable energy.
  
• Texas Pacific Land Corporation (TPL): Manages land and mineral rights in Texas, generating revenue from oil and gas royalties, leases, and easements.
  
• Vistra Corp. (VST): An energy company offering electricity generation, retail services, and renewable power solutions across the U.S. through its integrated platform.

 

What Happens After Back-To-Back 20% Gains?


“Don’t look for it, Taylor. You may not like what you find.” -Dr. Zaius to Taylor (Charleton Heston) at end of Planet of the Apes

Many bears are back at it, claiming that because stocks are looking at back-to-back 20% gains then 2025 must be doomed. Unfortunately, all we have to do is look at the data to see they once again could be on the wrong end of this amazing bull market.

Just as Dr. Zaius tried to warn Taylor in The Planet of the Apes that he may not like what he finds, the bears might be disappointed to find that strong returns after back-to-back 20% years is perfectly normal.

Using total returns (since 1950) we found eight other times stocks gained 20% two years in a row and the next year was higher six times and up a solid 12.3% on average. Now what really stood out to me about the data below is the mid- to late-1990s saw an incredible record five years in a row of 20% or more gains. We didn’t have social media back then, but I could only imagine how mad that would have made the bears.



2024 of course isn’t over yet, but it is pretty incredible that as strong as last year was, this year is up more right now. For more of our overall views, as we laid out in Why We Aren’t Permabulls, we think continued gains in 2025 are likely, as the overall economy remains pretty solid, which we discussed in The Economic Outlook Looks Pretty Good – Part 1 and Part 2.

The bottom line is up 20% two years in a row actually suggests the potential for better than average returns in 2025, something we are on record is expecting next year. I will keep this one fairly quick, as this week we are putting the final touches on our Outlook 2025, which we will release in January.

We wish everyone out there a happy Thanksgiving. Enjoy some downtime with family and friends! Thanks for reading.