The day after the Nov. 5 election, equity markets shot higher on the prospect of a pro-business administration, lower tax rates, deregulation and a robust economic outlook. The major averages raced to new all-time highs in the first week of December, and some of those gains have since faded, primarily due to rising bond yields and a more hawkish Fed policy statement, even though the Fed lowered the Fed Funds Rate and the Personal Consumption Expenditures (PCE) index came in below forecast.
The notion of increased tariffs and reduced immigration has stoked some concern among investors that inflation could be rekindled, thereby also raising the specter of bond yields on the long end of curve rising. The yield on the benchmark 10-year Treasury Note closed out the week with a yield of 4.62%, marking the highest level since June of this year, even though reports on Durable Goods, Consumer Confidence and New Home Sales all came on the light side of consensus estimates. However, Initial Jobless Claims came in lower than forecast.
The last couple of weeks have witnessed some rough trading sessions, with the VIX spiking to 28.0 on Dec. 18, followed by a not-so-friendly sleigh ride by both the bond and stock markets. The VIX closed out the week at 15.95 but left its mark on near-term investor confidence that put the market on the defensive as the year comes to a close. The Magnificent Seven stocks that re-emerged to lead the market to new highs earlier this month have also been dominating the market’s current pullback.
Still, if the markets continue to keep pace with the 2016 cycle, investors are in for a treat in 2025. By the end of 2017 during Trump’s first term, the Dow Jones index surged 34.8%, the S&P gained 25% and the Nasdaq leapt 32.9%. Considering the red wave effect in Congress, the potential for another strong year following 2024 is definitely in the cards.
There seems to be a consensus that economic growth and corporate sales and profits will be surprisingly good, but what 2025 brings with it is the potential to see real progress on the budget deficit, and ultimately, the national debt that currently stands at $36.1 trillion. The newly formed Department of Government Efficiency (DOGE) has its work cut out to even consider finding $2 trillion in spending cuts without seriously affecting essential services and programs.
But one thing that does seem certain is there will be an immediate supply of homes for sale in the Washington D.C. area when the culling of the federal employee workforce campaign begins. DOGE intends to get rid of, and or, relocate 100,000 jobs out of Washington D.C. immediately. “If you require most of those federal bureaucrats to just say, like normal working Americans, you come to work five days a week, a lot of them won’t want to do that,” Ramaswamy said during a November appearance on Fox News.
Ramaswamy has suggested that DOGE — which, despite its name, is an advisory commission — plans to think big and move swiftly. “We expect certain agencies to be deleted outright. We expect mass reductions in force in areas of the federal government that are bloated. We expect massive cuts among federal contractors and others who are over-billing the federal government,” he said on Fox. “So yes, we expect all of the above, and I think people will be surprised by… how quickly we’re able to move with some of those changes, given the legal backdrop the Supreme Court has given us.”
Veteran investor Ed Yardeni has made a bold prediction that the S&P 500 will reach 7,000 by the end of 2025. His forecast is driven by a scenario he calls the “Roaring 2020s,” which anticipates strong productivity gains, GDP growth of 3.0-3.5% and inflation cooling near 2.5%. Yardeni also expects the S&P 500’s earnings per share (EPS) to grow by 18.8% in 2025, reaching $285. If Yardeni is right, investors are in store for the S&P to gain 17% from its current level. For 2024, the S&P is ahead by 22.7% as of Friday’s close. Another 17% would certainly be a wonderful extension of the secular bull trend that would build on two years of solid gains. Happy New Year!
