A friend and financial advice client has been spooked by the Trump victory, the magnitude of the Trump rally and the people he has recruited for key positions in his future administration. However, I have reminded him that letting personal emotions drive investment decisions has been identified as a big mistake when it comes to stock markets generally.
I believe in the power of gut feeling when it comes to big decisions, and they can work with individual companies. But overall stock markets are driven by many forces, companies and decisions by both buyers and sellers of shares. While President Donald Trump comes with a bag of balls that could be thrown with a worrying curve, I want to survey a range of analysts to see if my cautious optimism for stocks is backed up by sound arguments.
A good starting point to see what the market thinks about Trump and the current rally is to look at the VIX index, or as it is known, the fear index.
“The CBOE Volatility Index, known on Wall Street as the VIX, helps traders track when a market rally is actually unhealthy”, said DataTrek co-founder Nicholas Colas. “Though the Street’s so-called measure of fear is in a favourable spot right now, it’s worth watching if the market upswing — which began after Donald Trump won the U.S. presidential election — continues.
“Monday’s close for the VIX around 15 “is a healthy sign” for the temperature of the market as it advances, Colas wrote to clients. For reference, all three major stock market indexes finished Monday’s session at all-time closing highs.
Colas said to expect the fear gauge to stay around current levels through to the end of the year, meaning any further gains don’t need to be viewed as a harbinger of a bubble. But he said investors should take pause if the VIX surpasses 20 and stocks continue climbing.
I’ll be watching the VIX but I will move on.
Now let’s look at what CNBC headlined in this intriguing way: “The stock market is about to do something extremely rare in its history!”
The S&O 500 is on pace to deliver a second straight year of gains above 20%. Historical data shows how uncommon that really is.
After last week’s postelection rally, the S&P 500 is now up by about 26% on the year. That comes after the broad index climbed more than 24% in 2023.
If the S&P 500 once again ends the year above 20%, that would mark only the third time there have been back-to-back gains of that size in the past century, according to Deutsche Bank. The latest leg up comes as stocks have entered what Parag Thatte (a Deutsche Bank strategist) called a sharp rally, following the presidential election victory by Donald Trump.
“Rallies following close elections have been the historical norm as we have previously noted,” he told clients in a report Friday. “But the current one is clearly faster than prior ones.”
Historical data also shows reason to believe more upside could be on the horizon.
Wall Street investment bank Oppenheimer looked at the 11 years in which the S&P 500 jumped more than 20% over the first 217 trading days. In those years, the smallest additional gain from that point through to the end of the year was 0.5%.
That means that, if history repeats itself, the S&P 500 should end 2024 above 6000. What’s more, Oppenheimer found that gain matching the median advance in those 11 years would push the S&P 500 to finish higher than 6200.
On the subject of intriguing headlines, the finance.yahoo.com website led with: “The Stock Market Is Doing Something It Has Only Done 6 Times in 50 Years. It Could Signal a Big Move in 2025.”
In case you haven’t been counting, the S&P 500 (SNPINDEX: ^GSPC) has advanced 80% since 2019. Most of that upside came from a relatively small number of stocks called the Magnificent Seven, which accounted for half the rise. Consequently, the S&P 500 has become increasingly concentrated.
But this is an interesting piece of research: “The S&P 500 has outperformed the S&P 500 Equal Weight index by 8 percentage points this year, due largely to strength across its most heavily weighted stocks. That matters because the S&P 500 has only beat its equal weight counterpart by at least 5 percentage points six times in the last 50 years, and strong gains typically followed in the subsequent year.”
And the average gain is 17%!
The next question has to be whether a market rise driven by seven or so big companies could foil the historical pattern that suggests we should expect a rising market next year, but the JPMorgan Chase investment team is not worried.
“Since 1980, five of the 10 best years for the S&P 500 happened when the Fed was cutting rates,” according to Sarah Stillpass, global investment strategist at JPMorgan Chase. The Fed is cutting rates right now and while they note the riskiness of a market dependent on a handful of big companies, they said this about those businesses: “The Magnificent Seven are some of the most fundamentally sound companies in the world. They achieved an aggregate profit margin of 23.5% in the June quarter, while the other 493 companies in the S&P 500 had a profit margin of 8.5%.
“Furthermore, the Magnificent Seven companies are growing earnings faster than the rest of the index, and Wall Street analysts generally expect that pattern to persist through next year.”
This summary reinforces the above argument.
• 2023: The Magnificent Seven reported earnings growth of 31%, while the other 493 S&P 500 companies reported a 4% decline in earnings.
• 2024: The Magnificent Seven are forecast to report earnings growth of 36%, compared to 3% for the other 493 companies in the S&P 500.
• 2025: The Magnificent Seven are forecast to report earnings growth of 18%, compared to 14% for the other 493 companies in the S&P 500.
While this is all very good, could the Trump policies lead to a crash in 2025?
“Overall, there’s no obvious sign of a major market crash on the horizon, but a lot of factors could still shake things up,” says Joseph Camberato, CEO at National Business Capital, a fintech firm in Hauppauge, New York. “If global conflicts escalate it could affect stability. Right now, the market’s holding up, but investors must stay aware of a mix of uncertainty”.
The threat from Trump’s policies gets down to:
1. Tariffs lead to inflation, but they won’t be enacted, if they are ever introduced, until later in 2025 and wouldn’t affect inflation until 2026.
2. Geopolitical decisions around Ukraine and the Middle East, but these decisions could also end hostilities. Anyway, markets only react short-term to global conflicts.
Here are the opportunities from Trump:
1. Less regulation, which is tipped to benefit small businesses.
2. Lower taxes, which Wall Street will lap up.
And there are important tailwinds that should help market optimism, which include falling interest rates, with the CPI reading on Wednesday making markets expect another quarter percent cut from the Fed in December.
Meanwhile, corporate earnings remain at positive levels. While this Trump rally has probably set the US market up for a pullback, there’s bound to be a rotation into mid- and small-cap stocks, which will help the market indexes rise, which should give our market a positive lead-in.
Now throw in that the US economy looks strong enough to avoid a recession and that makes three good non-Trump reasons to stay long growth stocks.
There will be a time next year when I could get Trump anxiety, when I’ll head for more defensive plays, but it isn’t now. I’ll treat any sell-off in coming months as a buying opportunity, unless the 2025 President Trump shocks me with an unplayable curve ball. However, I think my experience means I won’t get struck out!
That said, I will be watching Donald’s pitches 24/7 very closely.
