Contributors:
Colby McFadden
Justin Singletary
Patrick Morehead
January, 2025
As we step into 2025, the financial markets present us with a series of fascinating paradoxes. The Federal Reserve’s rate cuts are met with climbing yields, post-election optimism contrasts with concerning valuations, and commodity markets show us a tale of two very different trends.
This complex backdrop creates challenges and opportunities for investors. While traditional market relationships appear to be shifting, our analysis suggests we’re entering a period that may require more nuanced strategies than we’ve seen in recent years.
In this edition of Market Minutes, we’ll explore these key market dynamics:
Most importantly, we’ll share how we’re positioning portfolios to navigate these intersecting trends while maintaining our focus on risk-adjusted returns.
Goldilocks, like interest rates, loves that “just right” spot—but she might be in hot water now.
The Federal Reserve slashed rates by a full percentage since September 2024, but the 10-year Treasury yield bizarrely climbed by the same amount. Has Goldilocks left rate-sensitive investors with a portfolio full of hot potatoes?
The Fed cut rates hoping that U.S. Treasury rates, specifically the 10-year Treasury yield, would decline in parallel, aiding in achieving a soft landing for the economy after a period of hyperinflation. However, the bond market seems to be threatening the Goldilocks fairy tale with a different story: rather than declining in response to Fed actions, the 10-year Treasury yield has climbed! This suggests the markets might be factoring in higher inflation expectations or skepticism about the sustainability of the Fed’s dovish stance.
This phenomenon has real-world implications for investors. Historically, like in 1994, 2003, and 2013, when the Federal Reserve cut rates, but the 10-year Treasury yield unexpectedly rose, it signaled market fears of inflation or policy shifts. This led to bond sell-offs, higher borrowing costs, and shifts in investment strategies.
Given this backdrop, diversification is key. Strategically including assets that can cause inflation (oil, energy and other commodities) creates opportunities; hedging with dividend-paying high value companies provides protection if rates stay high. For income over growth, consider companies with strong balance sheets that can maintain dividends despite higher rates. Additionally, real assets (commodities, real estate, etc.) might provide a hedge, and dynamic allocation strategies may be necessary if yields continue to climb.
Looking at the chart below, you’ll see the 10yr Treasury Yield has essentially behaved as we predicted:
This has allowed us to hold and add high income rate sensitive investments to the portfolios. If the 10yr Treasury continues its range bond behavior and sustains trading below 4.7% for the first half of 2025, we should continue to benefit from the income and possibly some capital gains these holdings can provide. However, if rates push above and sustain trade above 5%, these holdings will need to be replaced with new opportunities that benefit from higher rates.
We’ve been postulating that the 2020s may mirror the 1970s with cycles of stagflation, inflation, and back to stagflation. In the ’70s, investors in inflation sources like Oil and commodities did well while hedging risks in higher-income rate sensitive investments. Our models reflect this, with heavier weightings in high-value, high-dividend equities in energy, metals, and materials sectors.
If Goldilocks has indeed left the building—and the jury’s still out—investors need to brace for a potentially more volatile environment where old playbooks might not work as well. The rising 10-year Treasury yield reminds us that market dynamics are complex and often counterintuitive—requiring smart, adaptive strategies to navigate these challenging times.
A comprehensive financial strategy can help you make smart investment decisions.
With the 2024 election behind us, there’s a wave of optimism sweeping across the U.S., fueled by promises of economic growth policies. While many believe 2025 could be an unbeatable year for U.S. equities, seasoned investors remember Warren Buffett’s timeless advice: “Be fearful when others are greedy and be greedy when others are fearful.” This wisdom suggests a need for caution amidst the current market euphoria.
When zooming out to assess the broader market landscape in 2025, key metrics provide critical insights into whether stocks are priced in line with their intrinsic value or if they’re teetering into overvalued territory.
P/E Ratios: Currently, these ratios are at levels not often seen in historical context, suggesting that stocks might be priced higher than their earnings would traditionally warrant.
Market Cap to GDP: This ratio, often referred to as the Buffett Indicator, is also signaling caution. A high ratio can mean that the market’s total capitalization is disproportionately large compared to the economy’s output, hinting at potential overvaluation.
Historical data shows that when valuations reach such heights, markets often undergo corrections or enter periods of slower growth as they revert to more sustainable, mean valuations, ensuring long-term market health.
However, markets can remain irrational longer than most investors can stay solvent. The dot-com bubble of the late ’90s is a prime example where valuations were sky-high, yet the market kept climbing until the bubble eventually burst. Factors like low interest rates, continued investment from institutional players, or a lack of viable alternatives can keep the market buoyant, even when traditional valuation metrics scream caution.
For investors in 2025, preparation is key. All the tried-and-true advice rings true: Having cash reserves and a diversified portfolio can help weather periods of market irrationality. Keeping a long-term focus, regularly reassessing investments, and maintaining emotional discipline—being ready to go against the herd when markets appear overextended—will all be crucial.
In 2024 our models have been holding and adding into a balance of large cap growth and value stocks in the following high dividend paying sectors: Energy, Miners, Utilities, Basic Materials, Aerospace and Defense, Traded REIT’s and Large Cap Tech. As we move forward in 2025, as long as there are no major surprises in interest rates or equity markets, we anticipate holding our current mix while looking for a time we may need to hedge our holdings against a market correction.
Looking at the S&P500, Elliott Wave analysis indicates that the larger bull market that began in 2009 is entering its late stages. The typical behavior suggests a Three Wave market correction moving lower to the previous 4th wave low (around 4,000) after the current wave becomes terminal. The key question: Does this correction happen soon—or from significantly higher levels? We believe we’ll have that answer by the end of January 2025.
While the narrative for 2025 paints a picture of unstoppable growth, prudent investors will look beyond the immediate horizon. The key to success might not be in riding the current wave of optimism but in anticipating when the tide might turn—and remembering that in markets, it’s often the unexpected that shapes our outcomes.
Below is a bonus chart from our colleague, Jason Haver, who publishes market analysis on a weekly basis at www.pretzelcharts.com. Jason began publishing the chart in 2023 (I left his dated annotations, so you can see his track record) and it’s been a good guide to date.
Want to see what Dividend Investments we are buying, selling or hedging?
As we reflect on the commodity markets of 2024, it’s clear that it was a year of stark contrasts for investors, with some sectors soaring while others remained stagnant.
Bull Market Continues: 2024 marked a significant resurgence for metals and mining stocks. After a period of volatility, these stocks held crucial support levels and broke through resistance with a vigor that signaled a strong bullish trend.
Gold and Precious Metals: Gold, often seen as a safe haven, continued its upward trajectory, bolstered by global uncertainties and inflation concerns. Silver and platinum followed suit, benefiting from increased industrial demand in sectors like renewable energy and technology.
Base Metals: The demand for copper, nickel, and aluminum surged, driven by the global push towards electrification and infrastructure development. The transition to green technologies, especially in automotive and energy storage, played a pivotal role.
Mining Stocks: Companies in the mining sector, particularly those with diversified portfolios or a focus on these high-demand metals, saw their stock prices reflect the bullish sentiment in the commodity markets.
Sideways Grind: Contrary to the metals sector, oil prices and energy-related stocks presented a different story. Despite a laundry list of geopolitical events that traditionally would have sent oil prices skyward, 2024 saw oil prices meander in a frustratingly sideways pattern.
Market Reality vs. Expectations: Despite tensions in the Middle East, sanctions, and disruptions in oil production, the market discounted these risks due to:
Excess Capacity: Increased production from non-OPEC countries, coupled with strategic reserves being utilized, kept the supply side from becoming too tight.
Demand Concerns: Global economic recovery showed uneven progress, with some major economies facing slowdowns, thus capping the demand surge expected from these geopolitical tensions.
Investment Implications: Understanding long-term trends proved more rewarding than reacting to geopolitical news, particularly in the energy sector. The contrasting performance between metals and oil reinforced the importance of strategic diversification and careful risk assessment.
Long-time readers know we have been allocated to metals, miners, oil and energy stocks since 2023. We’ve increased our exposure to those asset classes throughout 2024 with mixed results. In an effort to “buy low”, our buy-the-dip process in the Energy sector has now made it one of our more important allocations for 2025. As I write, it appears Oil prices may be starting to break out of the pattern highlighted in our charts above, which could be beneficial in the first half of 2025. For Metals and Miners, we continue to believe the longer-term bull market is intact. Now, we’re watching to see if corrections in price continue to be sideways moves or if more volatility will develop.
2024’s commodity markets will be remembered as paradoxical—a booming metals sector alongside a stagnant oil market. Understanding these underlying supply and demand dynamics will be crucial for maintaining a balanced investment approach moving forward into 2025.
As we move into 2025, several critical market signals deserve close attention:
Treasury yields continuing to climb despite Fed rate cuts suggests we’re entering a more complex rate environment. The 4.7% to 5% range remains crucial—a sustained break above 5% could force significant portfolio adjustments, particularly in rate-sensitive holdings.
High equity valuations coupled with late-cycle Elliott Wave patterns point toward increased market vulnerability. While stocks could stretch higher, the potential for a correction toward 4,000 makes defensive positioning increasingly important.
In commodities, metals maintain their upward trajectory while oil shows signs of breaking its sideways pattern. This divergence creates selective opportunities for patient investors who understand the underlying supply-demand dynamics.
Our portfolios reflect these complexities through strategic positions in high-dividend sectors, balanced exposure to both growth and value, and careful attention to market signals that might warrant tactical shifts.
For these reasons, we’ll continue updating you on these key developments in future editions of Market Minutes From The Boardroom.
Until next time, take care.
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