Twenty twenty-five has come to a close and the markets are posting yet another strong year. Market participants should be gleeful, but anxiety remains elevated as the fear gage, VIX, rests at 16. A level rarely breached from all of 2013 to 2020. I suppose it’s only human to worry about what could go wrong when (market speaking) things are looking so good. After all, the NYSE Composite and Russell 3000 (accounting for 98% of all stocks) just closed at all-time highs. The Dow Jones Industrial Average also closed at new highs and financials continue to post new highs all across the globe. Healthy bull markets are reliant on healthy financials. Additionally, every sector in the S&P 500 is trading above it’s 200-day moving average except for one – consumer staples. This is exactly what you want to see in healthy bull markets. We are a consumer-based economy and traders and portfolio managers know that when the music is coming to an end and they need a place to park their cash it’s consumer staples (toothpaste and such) they turn to. When markets are still in uptrends and investment appetite remains robust consumer staples lag. All this to say 2025 is coming to an end but the bull market is not. Until the trend tells us otherwise the evidence is in favor of staying long stocks.
This time of year it’s always fun (and hopefully beneficial) to predict what we will see in the markets in the year ahead. Just as farmers have a Famers Almanac investors have a trader’s almanac. We can look to it to see what happened in the past in similar circumstances. In this case, the upcoming year happens to be year two of the four-year presidential cycle, historically the weakest for stocks. In previous cases the trend of sideways or upward already in place continued for the first part of the year before getting wonky in quarters 2 and 3. Usually things pick back up again in the fall however, as a strong seasonal tailwind kicks in before Halloween and runs into the next year. Obviously, things do not have to work out this way, and it might sound like tarot card reading to some. But there is a fair amount of history to back it up and we do know that behaviors and prices trend over time. That doesn’t mean we can just rigidly believe in our forecasting and tune out what is right in front of us. The markets have a long history of making fools out of investors living in certainties. The best approach is to monitor whether the current trends are either in-step or breaking with historical norms while at the same time scanning below the surface to see if anything is starting to deteriorate underneath. Things like the advance-decline metric, new highs vs new lows ratio, and several others. Additionally, we’ll look to see if aggressive sectors like technology and consumer discretionary are showing signs of weakness. Then, we’ll check overseas to see if the broader and emerging markets are still in uptrends. Lastly, we’ll check in on areas that are in a downtrend and determine if they are likely to be the culprits of the next bear market. For example, previously we discussed the drawdown in high flying stocks like Palantir and quantum computing stocks. But since their free-fall in November things have stabilized. If a culprit can’t easily be identified there probably isn’t one yet. If after all this analysis things still look positive, then they likely are.
In short, our New Year’s prediction is for generally positive winter and early spring, perhaps a rough late spring and summer, and then a renewed uptrend in the fall. Only time will tell, but we’ll be watching and adjusting accordingly. Happy New Year!