The Bull Thread

Day After Christmas – NASDAQ & Russell 2000 Up 72.2% Of Time



Santa Claus Rally starts today. The Santa Claus Rally was discovered and named by Yale Hirsch in 1972 and published in our 1973 Stock Trader’s Almanacas the last five trading days of the year and the first two trading days of the New Year. This short, sweet rally is usually good for about 1.3% on the S&P 500, but the real significance of the SCR is as an indicator.

It is our first seasonal indicator of the year ahead. Years when there was no Santa Claus Rally tended to precede bear markets or times when stocks hit significantly lower prices later in the year. As Yale’s famous line states (2025 Almanac page 118): “If Santa Claus Should Fail To Call, Bears May Come to Broad and Wall.”

NASDAQ and Russell 2000 have logged the greatest frequency and magnitude of gains on the day after Christmas. Since 1988, NASDAQ has advanced 72.2% of the time with an average move of +0.38%. R2K has also advanced 72.2% of the time with an average advance of +0.40%. DJIA and S&P 500 have slightly softer records, but bullish, nonetheless.

Two days after Christmas, the market is less bullish with NASDAQ down more often than up. Three days after Christmas R2K small caps take the lead advancing 63.9% of the time with an average gain of +0.49%.

Looking further out, from 1950-1985 last 5 trading days of the year S&P 500 up 34 of 36 years, average gain 1.24%. 1986-2023 up 21 of 38 (no change in 2006), average gain 0.44%.

 

Revisiting 12 Predictions From Our 2024 Outlook: What We Got Right, and Wrong


As we get ready to release our 2025 Outlook, I thought now would be a good time to revisit our 2024 Outlook. I recognize this is rare in our world, as it’s not often you see strategists revisit and reevaluate their calls. We don’t really think of ourselves as forecasters in the strict sense of the term, in that we’re not trying to predict economic variables, or even market moves. But we manage several multi-asset class portfolios and we’re always making choices within those portfolios, i.e. “predictions” as to the opportunity cost of overweighting or underweighting one asset class versus another. That’s another difference between a lot of the outlooks you see and the ones we put out — usually, the people writing these are not managing portfolios.

If you’ve followed us over the last two years, you know that we’ve had some strong views during that time, much of it in sharp contrast to the consensus. But our views are always translated to our portfolios, and it’s within that context that we evaluate what we got right and wrong. That’s how we try to keep ourselves honest during the process. (Of course, it’s reflected in portfolio performance too.)

One knock some critics have on us is that we’re “permabulls,” which Ryan pushed back on over a month ago. Of course, if you had to be a perma-anything, a permabull would be the way to go (though it may sell fewer newsletter subscriptions). As Ed Yardeni recently wrote (on the same topic of permabulls vs permabears), bear markets are infrequent and don’t last very long — that’s because they tend to be caused by recessions. Yardeni points out that since the end of World War II, eight of the 10 bear markets have coincided with recessions. That’s one reason why we spill a lot of ink (or keystrokes!) on discussing the economy, an area where our “prediction” for no recession in 2023 and 2024 was seen as quite bonkers at the time. It turned out to be the right call, but more importantly, we like to think we got it right for the right reasons. With that, here’s the verdict on 12 calls we made in our 2024 Outlook.

One: Upside from productivity growth means expansion will continue in 2024
Verdict: Correct

Real GDP growth will likely clock in between 2.5 – 3.0% in 2024, boosted by productivity growth that is running quite a bit higher than what we saw from 2005 – 2019.

Two: Our Proprietary LEI suggests expansion continues. Consumption strong amid real income growth.
Verdict: Correct

Our proprietary leading economic index (LEI) for the US never indicated a recession in 2023 or 2024. (We populate a similar measure for 30 countries, and wrap it up into 5 regions, and the world.) This was mostly on the back of consumption driven by strong income growth, and strong household balance sheets. Real income growth was also boosted by falling inflation and lower energy prices. Employee compensation rose 5.8% over the past year, while headline PCE inflation (personal consumption expenditures) was up 2.4%.

By the way, our US LEI remains in a fairly solid place as we move into 2025.



Three: Cyclical headwinds from fixed investment fading, especially amid easing rates.
Verdict: Mixed

We expected headwinds from the investment side of the economy to fade as interest rates eased in anticipation of Fed cuts, especially housing. We thought business sentiment would improve as rates pulled back and also expected continued growth in manufacturing construction and equipment spending on the back of fiscal programs like CHIPS and IRA. Housing was positive in Q1 but started to fade as mortgage rates stayed elevated. We didn’t get much of a boost in business sentiment (except post-election), but we did see manufacturing adding to GDP growth after the first quarter.

Four: Inflation continues to pullback
Verdict: Mostly Correct

Inflation measured by the Fed’s preferred metric, core PCE, was running at 3.2% year over year 12 months ago, and it’s at 2.8% now (core CPI pulled back from 4% to 3.3%). Strictly speaking, we were “right,” but in all honesty, we expected shelter disinflation to drive inflation even lower than its current pace (along with goods deflation, including vehicle prices). I’m taking away some points for that.

Five: Expect the Federal Reserve to cut interest rates 3-4 times in 2024
Verdict: Correct

We kind of nailed this. Technically, the Fed cut 3 times, but by a total of 1%-point. Note that markets were pricing in 6-7 rate cuts a year ago, and so calling for 3-4 cuts was not exactly “consensus”. We did expect inflation to pull back, allowing the Fed to cut, but we also expected economic growth to stay strong (thus avoiding recessionary cuts).

Six: Forward earnings continues to grow, along with profit margins
Verdict: Correct

Next 12-month earnings for the S&P 500 were at $242/share a year ago, and it’s currently around $272. Forward margins are also at record highs of around 13.5%.

Seven: Bull market should continue in 2024
Verdict: Correct

This was supported by all of what came above — a strong economy, rate cuts, and earnings growth — but also the fact that historically, election years do better. All of this ended up being right, and we positioned our portfolios close to maximum equity overweight across the year. Now we did expect low double-digit returns for the S&P 500 in 2024, but strong momentum over the first six months led us to up that to around 20% in our Mid-Year Outlook. We adapt! Yes, 2024 total returns are likely to be quite a bit higher than that, but I’m still giving us full points for this. As I pointed out at the top, at the end of the day, it’s the portfolio decision that counts, not just the “call.”

Eight: Mid and small caps favored on the back of more favorable valuations and easing rates
Verdict: Wrong

This one hurts. An above-trend economy, easing rates, growing earnings, and more attractive valuations is what led us to make this call and overweight mid and small caps in our portfolios, although it was only a moderately sized bet. One thing people say when small caps underperform is that the Russell 2000 index has a lot of negative earners. However, we use the S&P indices, which screen for positive earnings, so that’s not an excuse. In fact, year to date (through 12/26/24), the Russell 2000 index is up almost 14% on a total return basis, versus 10.7% for the S&P 600.

Another argument here is that it’s all about the Magnificent Seven stocks. But this would be bit of lazy analysis on my part. What’s interesting is that in 8 of 11 sectors, the market cap-weighted sector index outperformed the equal-weighted sector portfolio — industrials and utilities were the exception (the returns were close), along with real estate. So, this wasn’t just about Technology, or Tech-adjacent stocks. In almost every sector, returns favored the largest companies. This is something we’re thinking deeply about and will discuss in the future.



Nine: Financials and energy sectors favored
Verdict: Mixed

Financials ended up being the second-best performer amongst the sectors, but our energy call was off. Though full disclosure: we removed our energy overweight early in the year, and overweighted communication services and industrials (along with financials). We do reserve the right to change our minds.

Ten: Intermediate maturity bonds outperform short maturity as Fed cuts
Verdict: Wrong

We got this wrong, plain and simple. At the same time, we were heavily underweight fixed income, and Treasuries, in our portfolios. So, we weren’t too unhappy to maintain duration close to that of the Bloomberg Aggregate Bond Index, even though it would have literally paid better to be in cash (short maturity Treasuries). Having longer duration did help during the bout of volatility we had in August, when treasuries rallied. Also, we diversified our diversifiers, with exposure to gold and managed futures throughout the year. That more than overcame any drag from holding onto longer duration bonds (relative to Cash). But I’m still going to rate this “call” as something we got wrong.

Eleven: Credit likely to outperform Treasuries, but we prefer equity risk
Verdict: Correct

We got this right, and it was based on a strong economy with no recession in sight. Here are year-to-date returns for bond indices as of 12/26/24:

• Bloomberg US Aggregate Bond Index: 1.1%
• Bloomberg US Treasury Index: 0.4%
• Bloomberg US Corporate Index: 2.2%
• Bloomberg US Corporate High Yield Index: 8.1%

However, as I noted at the top, what matters is not the just call itself but portfolio construction. And from that perspective, credit’s strength versus Treasuries is irrelevant. We had better exposure to the driver of that credit component through equities. And that’s why I rate this is as correct.

Twelve: US over international equities, due to a stronger dollar amid stronger relative economic growth
Verdict: Correct

You may be saying “Duh! Of course, you should underweight International given the last decade of outperformance by US stocks.” But again, we’d rather be right for the right reasons. The US economy did outshine everyone else in 2024, as we expected (and gave us enough reason to overweight US stocks). But we also saw dollar strength (even prior to the election), which ended up being an additional headwind for international equities. The MSCI All-Cap World ex US index rose 13.1% in local currency terms (through 12/26/24) but was up just 5.5% in USD terms.

Here’s the final count:

• 7 Correct and 1 Mostly Correct
• 2 Mixed
• 2 Wrong

Once again, I want to stress that it’s not about the calls, but how they translate to the portfolios we manage. And from that perspective, the verdict is actually better than what I summarized above. We obviously did get some calls wrong, but that’s also where portfolio construction matters, along with risk management. An important point here is that we do have broadly diversified, risk-based benchmarks for all our portfolios. As my colleague Barry Gilbert wrote, selecting a benchmark is not a trivial affair. It serves as our effective starting point for portfolio construction, but it’s also the neutral point we’re comfortable sitting at when uncertainty is high and we don’t see opportunities to add differentiated value.

 

Seven Important Things to Remember in 2025


“Stocks take the escalator up, but the elevator down.” Old investing axiom

It’s New Year’s Eve today and 2025 is just around the corner. We know 2025 will bring with it new worries, concerns, and fears, but also new opportunities. But it is also important to take a step back sometimes and realize there are some things about markets that all investors should know that are timeless. As 2024 winds down, here are seven things we think all investors should know as we move into 2025.

Go Into the New Year Expecting a Double-Digit Decline
Remember August 2024? It might be hard to recall now, but global markets crashed on fears over the yen carry trade unwinding. We pushed back against the sell-off at the time, but still, knowing that Japan was having its worst day since the 1987 crash and US futures were down massively overnight made for a sleepless night for your dear authors on that first Sunday in early August.

In the end, the S&P 500 pulled back 8.5% from peak to trough, the largest drawdown of the year. Take note though that since 1980 the largest drawdown of the year has averaged 14.2%. If most investors went into each year expecting a double-digit correction as uncomfortable but perfectly normal, they probably wouldn’t get so worried when it happens. If it doesn’t happen at all in a year then all the better, but the odds of it happening the next year increase. In the end, 23 of the previous 44 years saw a double-digit correction, with 13 of those 23 years still finishing positive.



What Matters Is Time in the Market, Not Timing the Market
Time can be an investor’s best friend. Each year will have scary headlines and reasons to sell, but that doesn’t mean you should. In fact, the longer you are willing to hold, the more likely you’ll make money. On any random day the odds of stocks being higher is about a coin flip at 53%. A full week? 56.6%. A full month? 60.4%. A year? 71.2%. Five years? 80.8%. 10 years? 90.4%. And over 20 years stocks have never been lower.

Sure, no one wants to buy something and wait 20 years to feel really secure about gains, but imagine what the returns could be if you buy when stocks were in a correction or bear market? They get much, much better. There’s an old saying that it is all about time in the market, not timing the market, and this is something all investors need to remember.



Valuations Aren’t Always a Good Timing Tool
Do you like buying things when they are pricey? Of course not, and investors feel the same way. Here’s the catch though. There is virtually no proof that high (or low) valuations can predict what stocks might do the following year. Going out many years there can be some advantage, but don’t get sucked into avoiding the stock market because a talking head on TV tells you stocks are overvalued. We heard the same thing this time a year ago and stocks have added another 20%. If you want to lighten up on overvalued parts of the market that is fine, but to blindly go to cash could be a very bad mistake.

I looked at forward S&P 500 price/earnings multiples and S&P 500 returns the following 12 months and found the correlation was about zero. Without getting too geeky here, the correlation tells you how much two variables tend to move together. When the correlation is near 0, there’s no statistical tendency to move together at all, and that’s basically where we are. Rather than making investing decisions based on valuations, you are better off investing in days that end in ‘y’ if you ask me.



Don’t Mix Politics and Investing
I can’t tell you how many investors I’ve met over the years that didn’t invest in the stock market because of who is in the White House. A lot of people didn’t like President Obama and stocks did great. A lot of people didn’t like President Trump and stocks did really well. A lot of people didn’t like President Biden and stocks started slowly, but soared the past two years. This is obviously a bigger deal in election years and mid-term years, but it is still important to remember every year. I’ll say it one final time, don’t mix your political beliefs with your investing views.



Ignore the Scary Headlines; All Years Have Them
A cousin to the lesson above is remembering that every single year will have scary headlines. I’m old enough to remember back in 2013 when everyone freaked out because the island of Cypress was having financial issues. I’m serious, it was a very big deal for about a week and had many investors on edge. Then you look back and the S&P 500 gained over 30% in 2013 and you wonder what in the world we were thinking!

Here’s a great chart that shares some of the worst headlines we’ve ever seen, yet over time stocks still gained.



Average Isn’t So Average When It Comes to Investing
Historically, stocks gain about 9% on average, but a little known secret is that something near the average return rarely ever happens, in fact, much larger moves, both higher and lower, are quite common. Incredibly, going back to 1950 stocks had ‘about an average year,’ with a return between 8% and 10%, only four times, and the average return in an up year is 17.6%.

Another angle — after this year the S&P 500 will have gained more than 20% 22 times compared with an annual outright loss 21 times. In other words, the historical odds of a 20% gain are greater than a down year! Most investors aren’t prepared for this type of annual volatility, but it’ll help them if they indeed are.







Volatility Is the Toll We Pay to Invest
We will finish with probably one of the most important lessons for investors. While stocks have a strong economically based tendency to go up in the long run, it’s still perfectly normal for them to go down in the short run. As the quote at the beginning noted, the declines always seem to happen way quicker than the advances.

With thanks to our friends at Ned Davis Research, historically the average year sees more than seven 3% dips and more than three mild corrections of 5% or more a year. In fact, it is perfectly normal to see a 10% correction as well, as one happens on average once a year. Print this off and stick it to your desk, as investors could do themselves a big favor by remembering that each year will see volatility and it is the toll we pay to invest.



That’s seven important things to remember in 2025 and in every year. We wish everyone a Happy New Year and many happy returns in 2025.

 

Best Performing Stocks of 2024
Thu, Jan 2, 2025

Below is a look at the 20 best performing stocks in 2024 of current Russell 3,000 members. As shown, each of these stocks gained at least 349% last year, with eleven gaining 500%+ and four gaining 1,000%+.



Below is a one-sentence description of what each of the 20 best performing stocks in the Russell 3,000 in 2024 does to generate revenues:

• GeneDX (WGS): Provides advanced genetic testing and analysis to support precision medicine and healthcare solutions.
  
• Rigetti Computing (RGTI): Develops cutting-edge quantum computing systems and software for various industries.
  
• Sezzle (SEZL): Offers "buy now, pay later" financing solutions for e-commerce platforms and retailers.
  
• Dave (DAVE): A personal finance app designed to help users manage expenses, avoid overdraft fees, and build credit.
  
• SoundHound AI (SOUN): Develops AI-powered voice recognition and conversational intelligence solutions for businesses.
  
• D-Wave Quantum (QBTS): Specializes in quantum computing hardware and software to solve complex optimization problems.
  
• AppLovin (APP): Provides tools and services for mobile app marketing and monetization.
  
• Intuitive Machines (LUNR): Focuses on lunar exploration technologies and space systems for commercial and government missions.
  
• Root (ROOT): Offers personalized auto insurance powered by advanced data analytics and telematics.
  
• Summit Therapeutics (SMMT): Develops innovative therapies for infectious diseases and other critical health challenges.
  
• Redwire (RDW): Provides advanced space solutions, including manufacturing, infrastructure, and engineering for space exploration.
  
• RealReal (REAL): Operates a luxury consignment platform for buying and selling pre-owned high-end goods.
  
• NuScale Power (SMR): Develops modular nuclear reactor technology for clean and efficient energy production.
  
• Candel Therapeutics (CADL): Focuses on the development of oncolytic viral therapies for cancer treatment.
  
• Innodata (INOD): Provides data annotation, AI model training, and digital content services for enterprises.
  
• Janux Therapeutics (JANX): Develops innovative immunotherapies designed to treat various types of cancer.
  
• MicroStrategy (MSTR): Offers enterprise analytics, business intelligence software, and cryptocurrency-focused solutions.
  
• Rocket Lab (RKLB): Designs and manufactures launch vehicles and space systems for small satellite deployments.
  
• Byrna Technologies (BYRN): Produces non-lethal self-defense products and devices for personal and law enforcement use.
  
• Palantir Technologies (PLTR): Provides data analytics platforms and solutions for government and enterprise use.

 

What Happens After Stocks Gain 20%?


“How do you like them apples?” Will Hunting in Good Will Hunting

Welcome to 2025! First off, 2024 was a great year for investors, but it was one of the weakest final five days we’ve ever seen and the worst since 2005. Not to mention Santa Claus didn’t come, which you can read more about here, but I’m not too concerned about that as of now. Remember, we didn’t see Santa last year and stocks still saw huge gains.



The Bad News
The S&P 500 made 57 all-time highs last year, which was the fifth most ever and most since 70 in 2021. Here’s the catch, a lot of new highs hasn’t been a good sign of the following year and many have pointed this out as a reason to be skeptical in 2025.



Since the S&P 500 moved to 500 stocks in 1957 there have been six other years that had 50 or more all-time highs and the next year was lower four times, with an average return the next year of only -1.5% those six times.

Chalk this up as a worry, yes, but let’s also put this in context.

The S&P 500 made a grand total of ONE new all-time high in 2022 and 2023. Looking at those other six years that had 50 or more all-time highs I found the two years before the big jump in new highs averaged another 34 all-time highs.

One other way to put it is the average number of new highs for any random three year period is 54. Which puts the 58 new all-time highs the past three years in perspective and what we’ve seen lately is perfectly normal.

Maybe I’m just a glass is half full type of guy, but the lack of new highs the two previous years is a big difference between now and those other years and another reason to think 2025 could be solid for the bulls and we’ll see a lot more new highs.

What About After a 20% Gain?
As you’ve probably heard a few times by now, stocks gained more than 20% for the second year in a row. Here’s something you might not have heard though, the returns the next year actually get better after a 20% gain.

That’s right, the average year gains 9.5% and is higher 72.0% of the time. This jumps to 10.6% and 81.0% after a 20% gain, suggesting better than average returns and the bull very well might have a little more up his sleeves this year. But taking this one step further shows that after back-to-back 20% gains the next year is actually up 20% on average and never lower. How about them apples?



Here’s the data for all the years after 20% gains. It is worth noting we’ve only seen back-to-back 20% gains four times, with three of those times taking place in the 1990s (and the other in the 1950s). Yes, that’s a small sample size, but I’d still rather know this than not know it.



The bottom line is history says not to be scared of 20% gains and the likelihood of 2025 seeing double digit gains (or more) is high.

What more good news? We are set to release our Market Outlook 2025 in exactly one week. Stay tuned and thanks for reading!

 

Small Business Expectations vs. Reality
Tue, Jan 14, 2025

This morning's release of the NFIB's Small Business Optimism Index for the month of December was expected to fall down to 101.4 versus a reading of 101.7 in November. However, the politically sensitive report has continued to surge following the election. The index rose all the way up to 105.1 to set the highest reading since October 2018. As shown below, small businesses have gone from being extreme pessimists six months ago to extreme optimists today.



Small business optimism has now surged 11.4 points since the October report, which is a record two-month increase in the history of the survey going back to 1986. As shown below, the only 2-month increases that even come close were a comparable 10.9 point increase in the wake of the 2016 election, a 9.7 point rebound in June 2020 after the worst of COVID lockdowns, and an 8.9 point jump in March 1991.



In the table below, we provide a breakdown of the levels of each category of the report in December as well as the month-over-month change and how those all rank as percentiles of their respective historical range. Obviously given the surge in the headline number, there were multiple categories that saw top decile month-over-month jumps in December.



As shown in the table above, the single largest jump of any category was for expectations for the economy to improve (the outlook for general business conditions). That index rose 16 points to reach the second highest level on record. The current reading is only one point below the record of 53 set in March 2002.



As the outlook for the economy improved dramatically, small businesses are increasingly thinking it's now a good time to expand. As shown below, 20% of firms reported that they view the next three months as a good time to expand. That is the highest share of the post-COVID era.

The NFIB provides a breakdown of the reasons small businesses have for their current expansion outlooks. For those with a negative outlook, 19% report that it is due to economic conditions with an identical percentage for those reporting an uncertain outlook. In both cases, those were the most common reasons given. Alternatively, for those that gave a positive expansion outlook, only 4% reported it was due to the economy whereas an overwhelming 10% indicated it was due to the political climate. In other words, small businesses see now as a good time largely due to changes in the political, rather than economic, landscape.



As we have frequently noted in the past, one downside to the NFIB survey is the presence of extremely strong political biases, especially in the past few election cycles. Historically, the index and its components have been stronger during Republican administrations and weaker during Democrat administrations, hence the recent surge following President Trump's win this past November. With that said, certain categories of the report (which we highlighted in today's Morning Lineup) have tended to be less politically sensitive.

In the charts below we standardize and average across the individual categories of the report those that measure "actual" changes to the businesses (i.e. - actual earnings changes, actual sales changes, actual employment changes, etc.) versus those that survey on "expectations" or "plans" (i.e. - hiring plans, expect economy to improve, etc.). As shown, while both indices for expectations and actuals have risen significantly in the past couple of months, it's the former that has seen the more pronounced move. As a result, the spread between expectations and actuals hit a record high in December. That means in the history of the survey, there has never been a time in which small businesses reported stronger optimism and expectations relative to what they have actually reported is going on within their businesses.

 

Martin Luther King Jr. Day: Market Generally Better Before

Overall the market has been somewhat more positive, on average, on the Friday before MLK day and weaker the Tuesday after. Though trading is rather mixed with a relatively even split of ups and downs on the day before and the day after. DJIA has been notably weak on Wednesday and Thursday after, down 17 times in the last 27 years. This mixed and choppy performance is possibly due to the fact that MLK day can either land in options expiration week or the week after. Both weeks have been rather volatile and weak since 1999.

This year will be the 28th year that the stock market will be closed to honor Dr. King and his contributions to the world and civil rights. Martin Luther King, Jr. Day has only been observed since 1998 and market behavior around this holiday has not been added to the Stock Trader’s Almanac yet. We wanted to share with you the history of market performance around this holiday.

 

Softer Inflation Puts January Barometer in the Black

Up Januarys are followed by up years 88.9% of the time (40/45 years) with an average S&P 500 gain of 17.0%. Perhaps the Fed was sandbagging a little over the past month, resetting the market’s expectations on rate cuts. Lower core CPI ignited stocks. Headline CPI was a tick above expectations, but even at today’s monthly 0.4% rate Inflation Projections look tame 1st half 2025. Today’s rally may end the 6-week correction that shaved 4.3% off S&P 500, 5.6% off NASDAQ, 6.8% off DJIA and 10.4% off Russell 2000.

That 10-Year Treasury yield which wreaked havoc on stocks pulled back significantly from its high a couple days ago. Sentiment, which is often a contrary indicator, especially when its bearish, has also flipped from rather frothy levels to nervous these past several weeks with Investors Intelligence Bullish % tumbling to 42.4% from a high of 62.9% in early December. Bears are up to 32.2% from 16.1% and Correction is up to 25.4% from 19.1%.

The market has also wrestled with uncertainty related to the transition to Trump 2.0 and geopolitical hotspots. Next week’s inauguration and the news today of a hostage deal and ceasefire in Gaza may also be helping to alleviate some of the market’s recent jitters. Technically the market appears to have found support around the election breakout gap around S&P 500 5775.

 

Homebuilder Sentiment Improves and a Death Cross Nears
Thu, Jan 16, 2025

One of the later data releases this morning was homebuilder sentiment from the NAHB. The NAHB's Housing Market Index was expected to come in slightly weaker versus last month, falling to 45 versus 46 in December. Instead, it rose one point, which marks the highest reading since April.



At current levels, homebuilder sentiment is basically in the middle of the past three years range, but that also ranks only in the 31st percentile of all months in the index's 40 years of history. This month's improvement in the headline number came on increases in both present sales and traffic. But countering that was future sales plummeting six points to a three-month low.



Below we show the spread between future and present sales indices. In December, that spread surged to the highest level on record, meaning it was a historically optimistic outlook from homebuilders contrary to what was being reported for present sales. The inverse moves this month marks a reversal in that spread, although it is still at one of the highest levels in over a decade.



Geographically, homebuilder sentiment was mixed in January with declines in the South and Midwest countered by an increase in the West and a big jump in the Northeast. As shown below, sentiment is currently the highest in the Northeast. In fact, that index is now at the most elevated level since May 2022. That compares to other regions in which current readings are more middling versus recent years' readings.



Turning over to homebuilder stocks, the group proxied by the iShares Home Construction ETF (ITB) had opened lower and hit intraday lows right before the NAHB report was released, but the stronger than expected reading has sent shares higher as it is now up 0.23% on the day. Albeit ITB is up today, that is only putting a small dent in what has been a dramatic drop recently.

As shown below, the ETF was hit hard during the recent run up in rates over the past two months and at points was trading at historically oversold levels. The first of homebuilder earnings earlier this week offered some respite as KB Homes (KBH) reported a top and bottom line beat after the closing bell Monday (we also covered the company's conference call in one of our latest Conference Call Recaps). The stock is up over 7% since reporting and the broader group using ITB is up a similar degree in that time. With that said, recent declines have done their damage. The 200-DMA has begun to roll over and the 50-DMA has already been falling sharply. Currently, ITB's 50-DMA is only 36 bps above that longer term 200-day moving average, putting the ETF on watch for its first death cross since March 2022.



The homebuilders are a rate sensitive area, meaning price action recently and in the near future is likely to be heavily impacted by where rates go. With that said, earnings are also always a catalyst. Below we show a snapshot of our Earnings Explorer and the next S&P 1500 Homebuilder stocks scheduled to report. As shown, these names have generally seen positive price action on earnings and for three of the five, guidance has impressively been raised over 10% of the time historically with solid EPS and sales beat rates to boot.

 

Big Returns in Surprising Places
Fri, Jan 17, 2025

Last weekend's Barron's had an article citing the fascinating results of a study from Arizona State professor Hendrik Bessembinder. In a recent paper, Bessembinder studied the performance of more than 29,000 stocks from 1925 through 2023 and found that most stocks lost money over time and that a small number of stocks are responsible for the majority of the market's long-term gains. Looking back at stocks with a minimum of 20 years of returns, the study found that Nvidia (NVDA) had the greatest annualized compound return, which should surprise no one. Looking further back, though, of the stocks that have been around since 1925, the three with the biggest gains were Altria (MO), Vulcan Materials (VMC), and Kansas City Southern (KSU). All three have generated annualized gains of over 14% (table below is from the paper). When you think of the market's biggest winners over the last 100 years, would you have ever guessed the trio would include a tobacco company, an asphalt company, and a railroad?

It's hard to imagine a sector of the economy that has been more out of favor in recent decades than tobacco. Given its addictive nature and how popular it was for most of the last 100 years, though, Altria's strength makes more sense. When it comes to Vulcan (VMC), it doesn't get less sexy than asphalt. Still, as the auto industry exploded over the last century, especially after WWII, and more Americans moved out of cities and into suburbs, none of it would have been possible without a company like Vulcan laying pavement. Just as networking companies have facilitated the movement of data around the internet since the late 1990s, companies like Vulcan and even Kansas City Southern can, in some ways be thought of as the networking companies of the physical economy of the 20th century.

When the same study is conducted in 2125 looking at the best-performing stocks since 2025, will NVDA be as exciting as a tobacco or asphalt company is now? If not, which companies of today will end up as the leaders of the next century?

 

Market Bounce After December Low Breach Encouraging

DJIA closed below its December closing low (page 36 STA 2025) on Friday, January 10, 2025 for the 39th time since 1950. Historically, this event has been associated with further market weakness. And with the Santa Claus Rally (SCR) failing to materialize this year our seasonal indicator antennae have been twitching. But S&P 500 did register a positive First Five Days (FFD) putting our January Indicator Trifecta at 1 for 2 so far with the full-month January Barometer (JB) holding the key. All three Trifecta components are based on the S&P 500 on a closing price basis.

This week’s softer inflation readings from PPI and CPI removed some of the market’s fears that sticky inflation would cause the Fed to hike rates. The 10-Year yield may have peaked here in the near term at least as stocks had their biggest one-day rally since the day after the election. Stocks appear to have found support around the election breakout gap around S&P 500 5775.

Reviewing the data associated with both the DJIA December Low indicator and the January Indicator Trifecta we found that there were only four other prior years that had a down Santa Claus Rally, a close below the prior DJIA December closing low and positive First Five Days and/or January Barometer: 1980 both FFD and JB up, S&P 25.8%, 1991 FFD down, JB up, S&P 26.3%, 1993 FFD down, JB up, S&P 7.1% and 1994 FFD and JB both up, S&P -1.5%.

In the above chart of the 30 trading days before and the 60 trading days after DJIA closed below its December closing low we have split the previous 38 DJIA December low crossings into four groups along with 2025 as of yesterday’s close (January 15) for comparison. With just four occurrences, years like 2025 have been second best on average with 1994 the big drag. The best performance was observed by the years that had the smallest decline after DJIA closed below its December low. Years with greater than a 10% decline after the cross had the weakest performance. Most importantly, it appears the quicker DJIA recovers after crossing below its December low, the better its performance was. DJIA’s quick rebound this year off the December low crossing is encouraging.

Using the same groupings to plot DJIA’s 1-year seasonal pattern we see nearly the same outcome. Full-year average performance is the best when one of the two remaining January Indicator Trifecta components is positive. Smaller declines and quick recoveries also lead to better full-year performance figures. Current readings are in line with our bullish forecast for 2025 with a base case of 8-12% and best case of 12-20%.

 

The US: Nicest House on the Block
Tue, Jan 21, 2025

President Trump's second term has officially begun. Since winning the election a little over two and a half months ago, the S&P 500 (SPY) has risen 5.42% through today. That's better than any of the other key country ETFs shown in the snapshot below. For the most part, these country ETFs have largely fallen since the US election with the two largest declines coming out of South Africa (EZA) and Brazil (EWZ). More broadly, emerging markets like these have significantly underperformed with an average decline of 8% versus only 1% for developed market countries. While most country ETFs have fallen since early November, in addition to the US, there are only four that are up on the year: Germany (EWG), Singapore (EWS), Canada (EWC), and France (EWQ). Canada's gains may come as somewhat of a surprise as the newly inaugurated administration has put the country at the center of tariff talks alongside the neighbor to the south, Mexico (EWW). We provided commentary on these topics in today's Morning Lineup. While EWC has risen, Mexico has been much weaker with a 6.5% decline since the election. Furthermore, Mexico (EWW) is currently the country ETF that's the farthest below its 52-week highs and closest to 52-week lows (3.71% away) of the ones shown.



In the chart below, we show the relative strength lines of the country ETFs for Mexico (EWW) and Canada (EWC) versus the United States (SPY). As shown, the two ETFs have seen relative performance drop since the election as tariff tensions have become more of a reality, but that weakness is in the context of longer-term underperformance that has been persistent throughout the past year.