Financial Markets Volatile as Rates Move up to 12 Month High

US Economy Performing Better than Expected with Select Group of Stocks moving Higher

January 5, 2025

By Mitchell Anthony

The US economy continues to surprise almost everyone! An economic slowdown or recession has been expected for the last two years but has not materialized. Employment has remained strong and retail sales and consumer confidence which had fallen off in early 2024 have begun to recover. The Fed had planned to lower rates much further but has seemingly made his last cut until further signs of economic weakness emerge. He is now not convinced that inflation is bottled up. (CPI Figure 3) The financial markets have been confused by the economy and the Fed which have both given us mixed signals on what lies ahead. Will inflation start to tilt back up again and put a clear end to the hope for lower rates? The Industrial side of the economy has been in recession for over a year and most industrial stocks have performed poorly as a result. The best performance in the equity market has come from large cap growth stocks which seem immune to the economic cycle and are driven more by secular consumption themes.

This was clearly illustrated in the performance of stocks in the fourth quarter. The magnificent seven stocks were up over 15% while most value cyclical indices were down and had negative returns. (Figure 1) MACM’s dynamic growth portfolio was up over 5% for the quarter compared to only 2% for the S&P 500 and -2% for most large-cap value indices. The alpha created in Q4 by MACM was largely a result of heavy weightings in secular growth companies and mag seven stocks.

MACM outperformed in Q4 and in all of 2024

High returns and strong relative performance for MACM Clients!

MACM had high exposure to MAG 7 stocks driving outperformance in Q4 and all of 2024. MACM avoided the downside of poorly performing bonds and held no fixed income securities in any of its balanced or asset allocation strategies. MACM also had no exposure to poorly performing emerging markets or foreign markets.

In the fourth quarter investors stayed focused on secular growth and continued to pour money into corporate American superstars like Apple, Amazon, Nvidia, Meta, Netflix, and Google. (Figure 2). Growth Investors have got it right for the last several years as these are the areas that have performed well in the economy and in the marketplace and it looks like there is no change on the horizon. Cyclical and value names will remain challenged and out-of-favor.

Global Themes of Consumption. Led by Corporate Spending and tied to Innovation!

Tech spending for Productivity, Web Computing now has AI Boost
Digital Devices – Steady & boosted by AI demand
Digital payment – Steady transition
E-commerce – Hmmm… still going
Cybersecurity – Strong
Housing – Hmm..
Entertainment & Leisure – Strong
Obesity – growing
Healthcare – strong & Steady
Electrification – Hmm.
Durable goods remains soft.
CYCLICAL CONSUMPTION SOFT
- Emerging markets soft.
- Europe soft

Economic Review and Outlook – Q4 2024 similar to Q2 24

Will 2025 be a repeat of 2024?

There are no signs that the economic themes that are prevalent in the US economy are changing and is easy to expect the current trends to continue in 2025. The themes of consumption that we have seen prevalent in our economy for the last few years involve:

debt fueled consumption as both the government and consumers have borrowed to allow them to spend above their means. Under Trump will high treasury spending continue? Likely not! Consumers have been forced to cut back on spending as debt is not as accessible. Wages have been high and more than inflation offsetting this problem. This will continue until employment weakens. Consumption has been modest with no great consumption themes for consumers for durable goods. As a result, economic growth has been modest averaging below trend of 2-3%. Consumers have spent heavier on services and leisure. This will likely continue. Notably we’ve never had a period of strong economic growth when housing is not involved. Thus far consumption on housing has been muted because of higher interest rates and consumers who are anchored to their 2% mortgages. Corporate earnings have been modest for the broader economy but great for the corporate American superstars that are benefiting from heavy corporate spending on technology and artificial intelligence capacity.

Financial Market Review and Outlook

Financial markets have done better than the economy and this is typically the case in that the Nirvana for the stock market is modest growth not strong growth. Exactly what we have today! Until stronger themes of consumption develop it is unlikely that growth will become robust and hence the Nirvana for stocks will continue. Conversely the Nirvana for fixed income or bond investments is recession or very weak growth with very low inflation. We have certainly had weak growth but lately with moderate inflation. No recession since 2009, if we omit covid, and this has kept bond bulls on the sidelines. It seems like this will likely continue until this economic cycle ends in recession or just consolidates the higher inflation over a long period of time.

MACM continues to believe the Outlook for equity markets is quite good as the nirvana continues and we remain bearish on the fixed income markets. It is unclear if we will ever see 2% interest rates again for an extended period. Growth stocks have far outperformed value stocks for over a decade. This is primarily due to the fact that value names tend to involve deeply cyclical companies that rise and fall with strong growth. They do well during periods of strong consumer spending and struggle during recessions. Again, we have not had a recession in a decade and at the same time have not had robust growth since 2006. As a result the growth in industrial cyclical names has been modest and this will likely continue.

Conversely large-cap secular growth companies (MAG 7) (Fig 1) remain in favor in the economy and in the financial markets. Investors are aware of this and have clearly followed this secular growth which has been the strongest ever for a narrow list. Global consumption of technology and artificial intelligence is just beginning and digital devices will only get better. The outlook for capitalism and innovation has improved dramatically since the election. America was leaning toward socialism and providing roadblocks to innovation under Biden. America is clearly now better off with Trump and the economic superpower of the world and will continue to be have its way.

We remain optimistic