The post-election “Trump Bump” for the stock market is now gone.
A quick look at the S&P 500 chart might make you think the wide-eyed enthusiasm for a de-regulated, tariff-fueled American economic boom time has turned pessimistic…
Nvidia (NVDA) is now trading at $132, $10 lower than where it traded on November 6. Apple (AAPL) is flat. Tesla’s (TSLA) stock price still has gains but has dropped 20% from its recent highs…
The US dollar has been on a tear, rising over 5% vs the euro. US bond yields are also soaring. The 10-year Treasury bond is hitting 4.8%, up from 3.7% in mid-September after the Fed cut rates for the first time. Rising bond yields mean that bond prices are falling. Investors want to own dollars but don’t want to lend those dollars to the US Treasury.
Over the next two days, we will get the latest inflation numbers. The Producer Price Index (PPI) tomorrow and the Consumer Price Index (CPI) on Wednesday. PPI is expected to make a big jump from 3% in November to 3.5% in December.
It sure looks like inflation is making a comeback. Combine that with Friday’s huge gains for NonFarm Payrolls and it’s pretty obvious what’s got investors worried…
The Rate Cuts that Weren’t
Just a couple weeks ago, the market was expecting a few rate cuts to help propel the economy and the stock market in 2025. That was a big part of the Trump Bump. And it’s now basically gone…
And in fact, investors are getting worried that the Fed may be forced to actually hike interest rates in 2025.
This won’t come as a surprise to Outsisder Club readers – I wrote in my Predictions for 2025 that we could see rate hikes this year.
But the disaster that the Fed is creating could be a big surprise for investors.
The S&P 500 closed for trading at 5,615 on September 19, the day the Fed cut interest rates by 50 basis points. On September 30, I told you: So we are likely to get one of those “melt-ups” for stocks for the balance of 2024.
And that’s exactly what happened. The S&P 500 hit its high on December 6 at 6,099.97 (which was 20 points from my 6,120 target).
Now, recall that the S&P 500 was hitting its highs in December – at the same time Wall Street analysts and strategists release their forecasts for 2025. With more rate cuts coming, they were downright giddy. 2025 forecasts for the S&P 500 mostly ranged from 6,800 to 7,100.
RBC strategists weren’t quite as bullish as most. They said they expect a 6,600 high for the S&P 500 this year. This morning, RBC’s U.S. equity strategist sent a note to clients that the S&P 500 may only hit a high of 6,200 in 2025…
You can bet that other strategist-types – the same ones that couldn’t see the 2024 bull market coming – are looking at their very bullish forecasts for 2025 and thinking “uh-oh.”
I told you that strategists were too bullish when I gave you my forecast on December 19, 2024.:
Coming into 2024, I was convinced that investors were underestimating the power of the Mag 7, that investor sentiment would improve and that P/E ratios would move higher.
The opposite is true for 2025. The average analyst price target for the S&P 500 in 2025 is 6,678. That’s too bullish…
My 2025 S&P 500 target is 6,325.
It’s the Fed, Stupid
I’m always a little amazed that Wall Street strategists aren’t better at forecasting. I mean, I get the same basic data they do. I can easily see that inflation is not tamed, and I can easily imagine that a return of inflation will mean the Fed can’t cut rates anymore. And I can simply conclude that without rate cuts, a major bullish catalyst is removed from the equation.
But when it comes to the Fed, the lack of foresight is downright shocking.
I agreed with the Fed’s 50 basis point rate cut on September 18, 2024. The unemployment rate had been trending higher since April, and had just hit 4.2%. And inflation had dipped below 3%. But I’m still not sure why the Fed didn’t take a “wait and see” approach after that big cut…
Because the unemployment rate backed off immediately and inflation data came in flat. And still the Fed cut rates two more times anyway (even as bond yields were rising)…
Now the Fed’s in a real pickle. The bond market has been saying for months that rate cuts are a mistake (that’s why bond yields have been rising and bond prices falling). And the Fed has finally admitted that there won’t be any more rate cuts anytime soon.
But what will happen if inflation returns? How long will it take the Fed to admit that it has to actually hike rates again?
Pay close attention to the CPI and PPI reports over the next two days. The market reaction to these data points are very important.
Cheers,
Briton Ryle
Chief Investment Strategist
Outsider Club
X/Twitter: https://twitter.com/BritonRyle
You Might Also Like:
The Unemployment Rate
https://www.outsiderclub.com/jobs-increase-and-stocks-sell-off-wtf/
We Still Like Nukes
https://www.outsiderclub.com/nuclear-is-back-baby/
Strategists Fail
