Next year several asset categories will be facing increased challenges.
US Equites:
US Equities had two back-to-back strong years. That fact alone should give us pause given the likelihood of a third consecutive strong year is low. Valuations are at record highs by almost any measure. “Although equities normally perform well in economic upswings, they have already shone in 2023 and 2024 and stretched US valuations make it hard for us to be optimistic about global equity returns,” Paul Jackson, Global Head of Asset Allocation Research, Global Thought Leadership, says.
There is also much uncertainty surrounding what the fiscal and trade policies will be under President Trump. Seventy percent of GDP growth comes from consumer spending, and another large contributor is government spending. Both will need to slow as the debt associated with seemingly runaway spending has grown too high.
Elon Musk promises to cut costs, reduce spending, and layoff government workers. Consumers are topped out at over $1 trillion in credit card debt that is increasingly going delinquent. As GDP growth stalls so will corporate revenue and earnings slow.
The S&P 500 price-earnings ratio today is over 30 times, about twice both historical PE mean and median. The Buffett Indicator, a measure of the value of the US stock market relative to the overall size of the US economy is now at a record high. Normal or baseline for this indicator is 100%, but today it has rocketed to over 200%. This calculation is based upon $60.9 total market value compared to $29.2 of GDP.
For the stock price to normalize more toward historical averages the market would need to fall 50% at present stock prices and current GDP. But if we do slow economically, given excessive national, business and household debt, the correction could conceivably be even more severe.
High-Yield Bonds:
The best way to assess high-yield bonds is by looking at “spreads.” A high-yield bond spread is the difference in the yield on high-yield bonds compared to investment-grade bonds such as Treasury bonds. High-yield bonds offer higher yields given they’re at higher risk of default. Spreads today are far tighter than historical averages.
Gold:
Gold had a great 2024, already, and as of today gold is up on the Commodities Exchange 21%:
Despite its strong performance in 2024, gold may face headwinds if inflation remains under control and interest rates stabilize. The continued strength in the US dollar makes gold more expensive for holders of other currencies.
If the US economy grows fast, we could experience higher interest rates, which in turn make interest-bearing assets more attractive relative to gold. Conversely, and perhaps somewhat counterintuitively, a slowing economy could lead to liquidations of inflated assets. Generally, in a recession the first assets to be monetized (sold) are the so-called “risk-on” assets such as speculations in gold and crypto.
If inflation is kept under control, the need for gold as a hedge against inflation diminishes. Gold is generally viewed as a hedge against inflation, but our Consumer Price Index has been coming down from 9.1% in June 2022 now getting closer to the Fed target of 2%.
If the economy finally does slow in 2025 our central bank, the Federal Reserve, is likely to cut interest rates. In that case we would expect a negative impact on gold prices. A shift in general market sentiment in terms of speculative investments also could fare badly for gold. Bitcoin and lately other crypto coins have moved parabolically as excitement for new Bitcoin investment vehicles and the support of President Trump for a Bitcoin Strategic Reserve has taken Bitcoin from around $69k to around $100k just since the election.
These factors could lead to gold trading down in 2025. “A de-escalation of geopolitical tensions in the Middle East and/or a resolution to the Russia-Ukraine crisis could trigger a sharp downward correction in gold prices, given how much the precious metal benefited from these conflicts throughout 2024,” according to Eren Sengezer of FXStreet.
These stocks are the most sensitive to economic downturns and are likely to underperform if the economy slows. Many of the lower-quality growth stocks enjoyed huge market price interest and stock price gains, and they now appear expensive in relation to their earnings and growth potential. Not much room to keep going up at this stage, and in fact a raft of bad quarters would be all it takes to precipitate stock selling.
Summary:
From the generosity of monetary and fiscal waves of trillions during the pandemic to today, that tsunami of free money has all but been spent at this stage. Consumer spending is increasingly coming from credit cards and depleted savings. Two out of three Americans are living paycheck-to-paycheck, one emergency away from bankruptcy.
With the employment picture stronger that at any time in a half century, the unemployment rate has only one direction it can move – up. The debt service will cannibalize otherwise productive use of capital and funds, and with relatively higher rates we are seeing the crushing impact it is having on government ($1 trillion in interest per year), and consumers (22.5% average credit card rates).
Almost all the credible financial analysts are today predicting 2025 to be largely a bullish continuation of the past two banner years. As I researched asset categories most opinions projected every asset category to go up markedly in 2025. In fact, in an article found in Business Insider you can count on the fingers of one hand the analysts who are bearish and believe we are heading into recession next year. Count me among those few.
Rodd Mann, Author
Rodd Mann writes about carving out a creative and unique new career in a changing world. His own career has taken him all over the world, working in accounting, finance, materials, logistics and manufacturing operations. Author, teacher, writer, consultant, Rodd has worked in many high-tech roles. Follow him here: www.linkedin.com/in/roddyrmann
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