All,
Over the past two weeks, I have spoken with several clients about the current investment climate. I wanted to share our discussions with everybody.
Is the Party Over?
Many of us believe that the party may be over. Last Friday, SPY rose. Well, it climbed back to its value on October 1, 2024. The so-called Trump Rally has stalled and may have come to its end. For the past five months, SPY has been a sideways train wreck. Please see the attached chart.
Let’s drill down a bit deeper. The S&P 500 index divides the 500 companies into 11 economic sectors. Two of these—Technology (XLK) and Consumer Discretionary Spending (XLY)—play a crucial role in identifying a Bull Market: They must rank as the top 2 of the 11 sectors.
But that’s not happening. See the attached charts.
Further clouding the picture is the performance of the Housing sector (XHB). It, too, is a train wreck. How come? Here’s J.P. Morgan:
The U.S. housing market is likely to remain largely frozen through 2025. Some growth is still expected, but at a very subdued pace of 3% or less. Demand — often understood through existing home sales (EHS) — remains exceptionally low. And though housing inventory is creeping back up, it still remains below the historical averages.1
Another huge problem is the widening gap between well-off Americans and not-so-well-off Americans. Consider this: According to the Bank of America Institute, “More than a quarter of households spent at least 95% of their income on necessities.”2 A sizeable percentage of Americans have little, if any, discretionary income. Well, that’s a slice of XLY—one of the two sectors defining the Bull.
Clouds Darken
Let’s look at some stark numbers. These paint a painful picture for many Americans.
Energy Costs
According to a recent survey by CNET, 62% of U.S. adults expect winter energy bills to “put a squeeze on their finances.” The same survey showed that 28 million Americans are already behind on their energy bills.3
Food Costs
The U.S. Department of Agriculture tracks “food insecurity” in the United States. That condition is defined as “uncertain of having or unable to acquire enough food to meet the needs of all their members because they had insufficient money or other resources for food.” In 2022, “at times during the year,” 17 million households experienced food insecurity. In 2023 (the latest numbers available), that number rose to 18 million.4
Housing Costs
“Nearly half (47%) cannot afford to buy a home in 2025. Of those who cannot afford to buy, 18% are Gen Z, 51% are Millennials, 24% are Gen Z, and 7% are Baby Boomers.” Those disturbing numbers come from a recent Fidelity IPX1031 survey.5
Credit Card Debt
The Federal Reserve Bank of New York just reported that Americans owe
$1.21 trillion on their credit cards. The rise paints a scary picture: In 2021, the debt stood at $770 billion. Today’s total of $1.21 trillion shows a 4-year increase of 55.8%.6
International Clouds Darken
International clouds are gathering on the economic horizon. The ongoing Russia-Ukraine conflict and the recent Trump-Zelensky dust-up have created a climate of uncertainty, and business prefers certainty. A recent analysis in Barron’s put it this way:
In the short run, Trump’s shake-up of U.S. alliances are likely to stimulate the global economy through greater fiscal spending and, should a Ukraine deal eventually come to pass, cheaper energy. But the longer-run effects of his quasi-imperial ambitions are more complicated and potentially less beneficial. They could make it more difficult for U.S. companies to do business globally.7
Further, any trade wars breaking out from President Trump’s promised tariffs could cut supplies and produce inflationary pressures. As stated the Washington Post:
As well as the potential for higher prices for consumers, trade wars can have unintended consequences in the longer term, with economists warning that price hikes could drive up inflation and erode corporate profit margins.8
And, according to the International Monetary Fund, “Global growth is projected at 3.3 percent both in 2025 and 2026, below the historical (2000–19) average of 3.7 percent.”9 Not a pretty international picture.
Local Clouds Blocking the Light
Local clouds add to a darkening economic outlook. The Northern Virginia Regional Commission reported in January that nearly 158,000 moved out of the region in 2022 while only 128,000 moved in. Those leaving are likely young families, squeezed by the high cost of housing.10
DC-area housing prices might not stay elevated. Or they might go higher. President Trump’s reductions in force might dampen prices while the back-to-the-office order might push them up. Business Insider describes this two edged sword like this:
Some residents fear that newly jobless federal workers will leave the city en masse, causing for-sale and rental inventory to skyrocket and prices to fall dramatically. Others believe that return-to-office mandates might prompt people to flood into the city, heightening demand as they look to move closer to work.11
Time for Defense
None of this is good news, and we are currently playing defense. We have moved our growth models to 55% invested and 45% cash. No one, of course, can promise or predict the future. We just look at the evidence before us and act accordingly.
I look forward to your comments and thoughts.
Jack
