Market mirage: Early gains turn to late losses, Gold glitters, and Santa is a no show

• It was a head fake – early gains turned to end of day losses.

• Oil surges – shrinking US crude inventories and stronger China demand.

• Gold surges – think the ‘safe haven’ mindset.

• Bonds tread water.

• Today is the last day of the Santa Rally – LOL! How’d that work out?

• Try the Pasta Faggioli (just makes you feel good!).

Yesterday’s early morning excitement was nothing but a dead cat bounce. The rally we witnessed in the pre-mkt failed to hold and turned into losses by the end of the day. The losses over the past week now total more than $1trillion – leaving many to ask, what’s next?

By the end of day the Dow lost 151 pts or 0.4%, the S&P down 13 or 0.25%, the Nasdaq lost 30 pts or 0.2%, the Russell added 1.5 pts or 0.1%, the Transports lost 72 pts or 0.5% while the Equal Weighted S&P added 10 pts or 0.15%.

There were a couple of winners in yesterday’s action – Energy – XLE gained 1.2%, Utilities – XLU + 0.8%, Communications – XLC + 0.5% and Healthcare – XLV + 0.05% - the other 7 sectors ended lower again with Consumer Discretionary the biggest loser, the XLY lost 1.3%, Basic Materials – XLB down 1.1%, Real Estate – XLRE – 0.9%, Industrials – XLI and Consumer Staples – XLP both down 0.35%, with Tech – XLK and Financials – XLF down 0.25%.

Down the food chain – Homebuilders – XHB lost 1%, Airlines – JETS -1%, Aerospace and Defense – XAR – 0.30%, Semi’s – SOXX +0.6%, Cybersecurity – CIBR + 0.5%, Oil & Gas Exploration gained 1.9%, Big Pharma – PPH +0.01%, Disruptive Tech – ARKK +0.2%, Quantum Computing – QTUM gained 1.55%, the Value trade SPYV lost 0.5% while the Growth trade – SPYG -0.05%.

The contra trades continue to work well for investors that bet on further declines – the VIXY + 2.1%, DOG + 0.4%, PSQ + 0.25%, SH + 0.3% while the SPXS + 0.8%.

Gold surged – rising $30 or 1.15% - many flocking to gold as that ‘safe haven’ play as stocks come under pressure and bond yields tease higher. After testing $2600 on December 30th, Gold has managed to rally $81 – trading up and thru one trendline resistance at $2658 only to kiss, test and fail to pierce another at $2686. This morning, gold is trading down $1 at $2668 as investors continue to remain cautious.

Bonds did manage to notch small gains…the TLT + 0.3% while the TLH rose 0.2%. This leaves 2 yr yields at 4.23% and 10 yr yields at 4.55%. A look at the charts suggests that we are now in the 4.5%/4.6% range for now. But remember – there are a lot of issues to consider – think the massive amount of debt to be financed - and my gut says that bond yields will remain higher for longer and if JJ continues to cut rates, the bond vigilantes will show him - sending bond yields higher again and that will only put a lid on stocks for now.

Oil – well the XLE surged by 1.2% yesterday and WTI surged by 2% - rising $1.40 to end the day at $73.12. The rise be credited to another week of falling US crude supplies, the prospect of stricter sanctions on Iran along with a story that suggests China demand is growing (that’s today, tomorrow they will tell us it is waning). Oil has now rallied by 7% since December 23rd, taking us up and through all 3 trendlines leaving us now in the $72.90 / $76 trading range. Now, the move – while dramatic – has happened quickly, so I would not be surprised to see it test lower again. Remember – when oil trades higher, the bears come out and remind us that the global outlook for oil is ‘soft’, and that NON-OPEC production continues to grow putting pressure on prices.

Ok – so look.

Here’s the deal - Markets begin 2025 with great expectations as anticipation of tax cuts and pro-business deregulation, an economic soft landing and ongoing Fed rate cuts to continue to help propel stocks higher like they did in 2024.

Starting with politics, investors are eagerly awaiting the implementation of pro-growth policies from the Republican Congress and Trump administration, which includes an extension of the 2016 Tax Cuts and Jobs Act along with possible additional corporate and personal tax cuts and sweeping deregulation. If executed properly, these policies should result in increased corporate earnings, personal incomes and spending (all of which are positive for stocks).

On growth, the Federal Reserve appears to have achieved the elusive economic soft landing, as economic activity is solid, unemployment is historically low, and the pace of inflation has declined substantially. That allowed the Federal Reserve to aggressively cut interest rates in 2024 (which I think was a mistake) and while investors expect rate cuts to continue in 2025 there is starting to be some concern that maybe we need to rethink that idea. Recent inflation data points are beginning to turn up – something that should surprise no one.

Finally, geopolitical tensions remained high in 2024, but investors finished the year with hopes for progress on ceasefire agreements between Israel and its antagonists (Hamas and Hezbollah) and between Russia and Ukraine.

Now, IF all these expectations are in fact realized, we should all expect another strong year of returns in the markets but let’s be clear….right now, I am not in the camp that we will see 25%+ returns again- but I remain wide open to change my mind.

However, as we all know, nothing in the markets is guaranteed and while the outlook is positive as we begin 2025, there are significant risks we must acknowledge.

Politically, Republicans hold small majorities in the House and Senate and large, complicated tax cut bills could easily be delayed (or derailed). Additionally, while investors have focused on potential positives of pro-growth policies, increased trade tensions and possible tariffs could create unanticipated market and economic headwinds.

On growth, the economy remains in a “sweet spot” with solid, but not spectacular, growth and the Fed can claim a soft landing has been achieved. However, growth can still slow - as some think that rates remain historically high (I do not think that they are historically high) and elevated stock valuations imply complacency in the markets regarding the possibility of an economic slowdown.

Geopolitically, while hope for progress on resolution of major global conflicts is high, nothing is guaranteed, and the possibility exists that both conflicts spread in 2025. In addition - investors now have to worry about what Xi Xi may do concerning Taiwan…. Recall that on New Year’s Day – he made it clear that ‘no one should get in the way’ of a China/Taiwan ‘reunification’. Suggesting that he is prepared to ‘take back Taiwan’ which will create all kinds of chaos on the global stage. Now to be clear he has not made a move (yet)…. but he continues to rattle the cages – so let’s see where he goes.

Finally, global bond markets are expected to have a bigger influence on stock returns in 2025 and IF bond investors think aggressive tax cuts or fiscal spending will dramatically increase the deficit or national debt, bond yields will rise and present a headwind on stocks (as we saw in 2022). In addition – the markets have to digest what is expected to be a ‘huge’ supply of new debt coming to the markets to pay for all of this spending, and that too has the ability to send bond prices lower and bond yields higher.

As I have mentioned, I am in the 4.75% - 5% camp for 10 yr yields before we see 4%. And while that could prove to be an issue for stocks, it is not a death knell at all. If the economy remains strong and inflation under control – stocks can do well in a 5% - 10 yr yield environment. The issue will be if the economy starts to fail – then stocks will not be able to perform in a 5% 10 yr yield environment.

US futures are higher again this morning…. Dow futures up but off their highs overnight – at 6 am they are up 58, S&P’s up 12, The Nasdaq up 65 and the Russell is ahead by 2 pts.

Eco data today includes ISM Manufacturing PMI – expected to be 48.2 (contractionary). Now yesterday’s S&P Manufacturing PMI came in at 49.4 – still contractionary but above the expectation of 48.3 – so keep your eyes on what todays’ report suggests…. Remember – 50 is the dividing line…anything north of 50 suggests expansion.

Next week is a full week of data – look for reports on Services PMI’s (which remain well in expansionary territory), Factory Orders, Durable Goods, the November JOLTS report, ADP employment, the December FOMC mins, Challenger Job Cuts, and the biggie – the NFP report on Friday morning.

European markets are all lower…. France continues to get beaten up – down 1% with Italy and the Euro Stoxx not far behind at – 0.7%. Germany is off 0.5% while Spain is the winner – only down 0.1%. Now, what’s funny is that they are saying that Europe is lower because the Chinese economy is ‘mis-firing’. I guess the European analysts should talk to the Oil analysts – because there are two different messages being bandied about…. Ken Broux- strategist at Societe General tells us that “There’s been many false dawns in China in recent months and it looks as though it’s unraveling again.” So, we are back to ‘it’s all about China’! I mean you can’t make this up, who would believe you?

Bottom line, while the outlook for markets is positive as we start the year, we won’t allow that to create a sense of complacency because when investors become too complacent all hell breaks loose. Speaking of complacency - the VIX – which is the fear index – has lifted its head of late….going from complacent (in the 13-15 range) to a bit ‘ edgy’ as it teases just north of all 3 trendlines – hovering at 17.90 – still below levels that caused sharp selloffs seen in September, October, November and December. But we all know how quickly that can change.

As such, you need to be prepared for whatever the market throws at you…..You need to be focused on managing both risk and return potential because the past several years demonstrated that a well-planned, long-term focused and diversified financial plan can withstand virtually any market surprise and related bout of volatility, including multi-decade highs in inflation, historic Fed rate hikes, and geopolitical unrest.

The S&P ended the day at 5868. We are getting ever closer to closing that gap created on November 6th…you know the one I have been ranting about for weeks now…. To fill it – the S&P would need to trade down to 5783 – which is just 1.4% away from here. I expect it to happen, so I am not convinced that the pullback is over…...I still think there is more work to do for markets…. but that will be the opportunity for the long-term investor. Earnings season begins on January 15th with the release of Big Bank earnings from JPM, C, BK, GS, WFC.

Pasta faggioli

Another comfort food dish…so good. I made this last night and posted all the pics on my X account - @kennypolcari

For this you need chopped celery, carrots and onions and a red (or yellow) bell pepper, 6 cloves of sliced garlic, 1 can of tomato sauce, 1container of beef broth, cannelloni beans, 1 lb. of sweet Italian Sausage (some people use ground beef), Olive oil, fresh grated parmegiana cheese and the cheese rind and 1 c of ditalini pasta, s&p and fresh basil.

Begin by adding some olive oil to the pot, then adding in the chopped veggies and garlic. Season with s&p. Sauté for 10 mins….

Next – add the sweet sausage– season with s&p and cook until nice and browned.

Now add in 1 can of tomato sauce and the container of beef broth, the cheese rind, 1 can of cannelloni beans – juice and all, and some fresh basil. Bring it to a boil, then turn heat down to low and let it all come together for about 10 mins. Taste and adjust for seasoning.

Now – bring it back up to a boil and add in 1 c of the ditalini pasta (you can also use small elbows) let it cook for about 6 – 8 mins. Taste. When serving – top with a fresh grating of Parmegiana cheese. Remember – the pasta grows and sucks up all the sauce – so less is more. Capisce?