It sure has been an eventful month since my last post and I hope you are all having a happy holiday season!
Congratulations to the several loyal readers who correctly guessed Lombard Street as the landmark I alluded to in my last post. Sutro swag should have made it to all of you who correctly guessed the windy San Francisco street, if for some reason you didn't receive yours please let me know!
Early in November, I found myself near the world famous one block stretch where Lombard Street winds through 8 hairpin turns. I hadn't driven that section in years so I gave it a whirl. While making the sharp turns, it dawned on me that the economy and stock market often resemble this section of Lombard. Just as drivers navigate the street's hairpin turns to reach their destinations, investors and policymakers maneuver through twists and turns in economic cycles, political climates and market behavior.
In honor of Lombard Street's octet of famous crooked turns, here are the eight topics that I consider the most important as we head into 2025:
- Inflation - I'm sure you're shocked that this is the first item in my list. The Fed is once again worried, as the latest read on inflation showed a slight tick upward to 2.7% (from 2.6%.) Like a nervous driver white knuckle driving on Lombard, the Fed is extremely nervous of external or internal forces adding pressure back to my least favorite 9 letter word.
- Tariffs(?) - Speaking of inflation...during his campaign President-elect Donald Trump's central economic policy centered around tariffs. Most economists agree that tariffs will raise prices (at least temporarily) so these may or may not be successful. And who knows if these will actually be implemented or simply used as a negotiation tactic.
- The Fed - Despite some very negative perceptions I believe that the Fed has done a stellar job of taming inflation, maintaining full employment and avoiding a recession. It will be interesting to see if they continue to lower interest rates in both the near and long term in light of ongoing inflation concerns.
- Corporate Earnings - Another longtime favorite metric is still solid with 91% of the S&P 500 reporting 75% have reported positive earnings surprises which is in line with the 10 year average. While Q3 earnings have met expectations, analysts predict that Q4 earnings will double from the current rate of 5.8% to 12%!
- Potential for Deregulation - Conventional wisdom suggests that a Trump administration will relax regulations making it easier for companies to do business and ostensibly make money. A move in this direction should benefit smaller companies, as well as those businesses who operate within environmental (or other) guardrails.
- Bitcoin - Speaking of deregulation, President-elect Trump has signaled both a Federal investment in Bitcoin, as well as the potential for a Crypto advisor in the White House. While I still don't quite see the mainstream utility for crypto (who is going to pay for their groceries or Netflix bill with Bitcoin?) I am also aware that there is no longer a mainstream adoption and utility for gold nuggets, which at one time was used as currency in the old west and is now invested in primarily as a hedge against inflation and currency fluctuations (though results have varied to say the least.) Could Bitcoin become the next "gold"? Maybe. Should the U.S. Government throw their weight behind the cryptocurrency, odds of major adoption could be favorable to the still new asset class.
- Jobs and Immigration - Like inflation, the unemployment rate ticked up slightly to 4.2% which while historically strong is (at least in the near term) directionally wrong. So what does that have to do with immigration? There is some fear that the new administration's hardline stance on immigration could lead to a labor shortage, particularly in agriculture and other lower wage labor intensive jobs. Thus, while the unemployment rate may well stay low, it may not tell the whole story.
- Taxes - The forthcoming Trump administration has indicated that they would extend his 2017 tax cuts (originally set to expire in at the end of 2025), bringing back State and Local tax deductions, reducing corporate tax rates, eliminating taxes on certain kinds of income (i.e. tips for restaurant staff) among others. In a nutshell, we are all likely to be paying taxes at similar rates as today if not lower. Additionally, lower corporate tax rates should mean higher profits across the board which may further help propel the current bull market.
Ultimately, while Lombard Street may feel chaotic in the moment, every twist serves a purpose in guiding drivers to their destination. Similarly, the economy and the stock market—despite their curves and unpredictability—are designed to reward those who stay disciplined, plan ahead, and embrace the inevitable twists of the journey.
Wishing you all a very Happy New Year! Until next time...
Steve