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Written by: Tim Taschler
As we roll into year-end, there are several issues that need our attention. With the US election over, market participants will be focused on the upcoming administration’s policy comments, staffing discussions and cabinet positions. High on the radar is information about trade, tariffs, immigration and tax policy. All of these can, and probably will, have a very large impact on the economy and the capital markets. We still have armed conflicts in the Middle East and Ukraine, and commercial real estate troubles in the US.
Amid all this uncertainty, stock markets are at all-time highs and very concentrated in the largest companies – in fact, the stock market hasn’t been this top-heavy in almost 60 years:
Axios, 11/21/24
At the same time, 56% of Americans think stock prices will trade higher over the next 12 months, the most in history:
Source: Barchart, 11/26/24
This bullishness can also be seen in the amount of money flowing into leveraged ETFs – these are ETFs that magnify the return on their underlying asset by anywhere from 1.5 to 3 times:
Source: Bloomberg, 11/24/24
We can see more of this market enthusiasm in a historic decoupling between energy stocks and crude oil prices. XLE, the ETF for energy stocks, has traded vastly better than the price of oil (using the ETF USO). Since commodity stocks tend to track with their underlying commodity, this type of divergence is worth watching:
Source: The Daily Shot, 11/26/24
Conclusion
We have markets at all-time highs and sentiment at extreme bullishness. At the same time, we have global strife and an incoming president that is announcing policy decisions and cabinet posts on his social media site.
Over the weekend, Trump announced 100% tariffs for BRIC countries that don’t support the US Dollar:
Source: Barchart, 12/1/24
In October, Trump said that his administration would seek a lower dollar.
Source: WSJ, 11/1/24
It’s difficult to rationalize threatening countries that don’t support the dollar while wanting the dollar to trade lower. These things move markets as traders place bets on what the actual outcome will be.
My best guess is that markets will be volatile and choppy until after the inauguration and cabinet posts are actually filled and policy initiatives are better defined. Positioning portfolios to handle an increase in volatility will be important, as will staying nimble to headlines and economic data points.
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