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Are we in a bubble of sorts ?
Dated : Jan - 12 - 2025
As I write this blog update , we are a week away from Trump 2.0 presidency. If we review the market sentiment, post election rally took SPY from 576 handle to 608. Now, as of Jan 10th, we are back to 580 and might retreat below the pre-election levels. Secondly, there has been generally weakness in industrials, real estate and small caps. Yield are also on the rise with 10year trending towards 5% and 20y and 30yr Treasury yield over 5%
In general , for a bubble, people have to be risk-onn and assume that no risk is less risk (i.e FOMO). However, I am not convinced we are max risk onn as of now. If anything lets look at the cash we have on sidelines with some charts
First Graph shows $6.8 Trillion in money market funds. Second Graph shows close to $2 Trillion in Retail only money market funds.
To me this signifies that investor are cautious. They are not broadly paying for some story or news but only invest where they see clear growth and ROI . There are always going to be valuation outliers - PLTR, TSLA, UPST..however broadly , its not that overheated as talked about in news.
S&P 500 P/E Ratio ( we are 90th percentile)
Salient Points to remember as we trade or invest in 2025
Cash is still plenty and sitting on sidelines as highlighted in charts 1 and 2
S&P P/E Ratio is at historic highs as show in chart 3 ( source : https://www.multpl.com/s-p-500-pe-ratio/table/by-year)
FactSet earnings graphs show that we need a much higher earnings surprise to push stocks sustainably higher for the same level of P/E ratio. If not, we move into a higher P/E ratio band which leads into a bubble
FOMC is probably going to have a tough decision making - cut short term rates and risk inflation come back vs. prolong the cuts and risk recession and labor market turmoil.
FOMC is probably going to start taking notes from BOJ on how Yield curve control works if 10year rates continue to move and stay higher
S&P peaked in Dec 2021 at 474 and as of Jan 12th 2025 is at 580. That is roughly a 7.5% avg. return per year in last 3 years ( approx. 23% cumulative). So its not a bubble per se.
How to play the field in 2025
As the saying goes, "make volatility your friend" to buy good business's and the index when the opportunity presents
Any dip of S&P Index which is 3% to 5% or so from its 30 day moving average is a must buy dip
AI , Data center, materials, commodity stocks, pharma, biotech - these themes will present opportunities for earnings growth and drive sector returns which will also drive up S&P returns.
Trump 2.0 will cause disruption and keeps markets confused and add to the volatility
Regulation will be become loose , labor laws will lapse which may cause white collar unemployment . Hence, companies will cut costs and show earnings growth
We will see Fed being accommodative to act - lower rates, start QE - buy longer dated bonds and mortgages to ease the pain in real estate affordability
Many pundits will show that US market concentration in MSCI World index is highest its ever been ( over 70%), and similarly concentration in the index and sector returns are coming from a handful of companies. However, this leads to room for improvement in valuation for the rest of the stocks and other emerging markets
The price you pay for risk will be for two main unknows - 1) higher longer dated yields 2) Inflation . If those moderate and come below expectations we have another bull market . I do believe they will moderate and investors will realize that its not going to stop growth in earnings and real economy
Real estate - both residential and commercial has to see more turnover. Supply dynamics should improve - with more incentives for builders, federal and municipal land grants to create more housing supply .
All these are catalyst's for markets to end the year higher , albeit with severe drawdowns
Howard Marks has a decent blog - although he tends to always sound more cautious than me given he buys more bonds than stocks. https://www.oaktreecapital.com/insights/memo/on-bubble-watch
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