Five for Friday - January 24, 2025
Returns, Tariffs, Breadth, Sentiment, and Computers
1. Perspective
In this month’s All That Matters, we discuss the market’s recent run and make the case that strong returns of late don’t guarantee bad returns going forward. The S&P 500 quintupled in the 1980s, only to do even better in the 1990s. Could the 2010s and 2020s be the sequel? Time will tell, but bull markets can last longer than one might think.
2. Trade
One of the key uncertainties about the new Trump administration is how aggressively tariffs will be levied and on which countries. While much is undetermined (and the unpredictability is part of the negotiating strategy), one thing seems clear: China will be a focus. The U.S. had already shifted to importing less from China following the 2017–19 trade war, and President Biden’s decision to leave most Chinese tariffs in place over his term only amplified the economic decoupling (and reinforced the bipartisan nature of that stance at a time when relatively little else is). This has also given firms with supply chains in China ample opportunity to start shifting production elsewhere, and many have already planned for this contingency. So, though the slow-but-steady decoupling of the U.S. and Chinese economies will have ramifications for decades to come, it is the uncertainty around Mexico that is likely to be crucial to the next few years.
3. Breadth
Over the last month, the S&P 500 Equal Weight (an index representing the “average” stock, where all companies are equally weighted at 0.2%) is up 4% while the S&P 500 is up just 2%. In fact, the Equal Weight index is actually outperforming the Big Tech-heavy S&P 500 since the midpoint of 2024, too. Don’t let anyone say it’s just 7 stocks working.
4. Sentiment
Post-election, one of the key tactical risks to the market was sentiment – by most metrics, investors were bullish-bordering-on-euphoric. While you need bulls to sustain a bull market, sentiment extremes tend to be contrarian indicators – if everyone is on the same side of the boat, it’s more likely to tip over. Sure enough, following an early December crest, the S&P 500 grinded lower through January, ultimately closing 4% below its all-time high (with small caps down 10%). This is a good thing. Corrections inside ongoing bull markets are healthy if they can reset hyper-bullish sentiment and create a more balanced investing environment. Via the AAII, investors feeling “bullish” was recently 15 percentage points lower than the percent “bearish.” Looking at other readings of -15 or lower over the last 30 years, the S&P 500’s median gain over the following year was 21%. As we progress into 2025, keep this investing axiom top of mind: “Bull markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria.”
5. On this day
in 1984, Apple launched its Macinstosh computer and changed personal computing forever. While not the first PC to have a graphical user interface, employ a “desktop,” or use a mouse, it is considered revolutionary for its focus on design, simplicity, and user experience. The mass appeal (and savvy marketing) helped turbocharge the personal computing movement, and today, over 300 million Americans carry a once-inconceivable supercomputer in their pocket.
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