Run Through the Tape

Investors can see the 2025 finish line now. With median fund returns ranging from 15 to 30+%, the trick will be to avoid stumbling at the tape.

The huge home runs of the past year are generating conflicting emotions for stock market players. Gold, Emerging Markets, and selective AI winners have produced eye-popping returns of 30-50%. And losing trades in Bitcoin are giving tax loss sellers an excuse to purge losers, such as Coinbase. With such enormous embedded gains in many portfolios, the incentive to take some off the table is strong. The 'calendar effect' will create a choppy trading environment for stocks in the near term. Both equity managers and individual investors are holding their collective breath, wishing that January could come early.

With a slowing economy and an easy monetary backdrop as the major macro drivers, the nascent rotation and broadening underway looks more like hope than fact. But that is typical, as my anticipation of a better economic outlook is still in its embryonic stage. I might be a bit early on this call, but isn't that what you (don't) pay me to do?

Just look at the Fed's 'dot plot' to see the level of uncertainty over the path of interest rates (chart below), with almost as many members predicting the end of the rate-cutting cycle as those arguing for more cuts. Meanwhile, the steepening yield curve is arguing with the hawks. Despite the weak data from today's U.S. employment report, longer-term yields are stuck in the low 4s. The sticky inflation backdrop, bulging Treasury issuance, and threats to Fed independence still seem troubling to bond traders seeking lower, longer-term yields from here.

Fed "Dot Plot"

As I have stated before, I'm of the view that the new year will bring new leadership for the U.S. stock market as the lagged response to monetary and fiscal stimulus gears up. Recovering consumer sentiment will allow the left-behind segments of the market to 'catch up,' and accelerated M&A activity will continue to force Mega Caps to share the wealth with their smaller sector brethren. The selectivity skills of stock pickers should be exposed in a more heterogeneous performance environment across the tech sector. The Bank rally has kicked off the rotation, so now it's time to look elsewhere for alpha.

From a macro standpoint, there will be a decreasing emphasis on Fed easing as a driver. This should remove a component of stimulus that has helped generate the spectacular performance of "long duration' equity assets - namely, the high PE stocks. Similarly, gold, which kicked Bitcoin's ass this year, should cede leadership to copper as the hard asset of choice. Oil looks sick here as the potential easing in the geopolitical backdrop argues against any supply shortage. All the while, OPEC+ has lost control of production discipline yet again. I don't rule out a seasonal collapse in early '26 that could push oil below $40/bbl.

So lots to chew on as we shift focus away from the stock tape to the scotch tape as you wrap gifts for the holiday season. I'm hoping for a good year ahead despite this week's dreadful headlines. At times like these, I believe hope is the right strategy after all.

Risk Model: 4/5 - Risk On

Since turning bullish two weeks ago, the signals have paused here but have confirmed the rally. The year-end crosscurrents have temporarily stalled the advance, as profit-taking, window dressing, and tax-loss selling dominate the action. I'm encouraged that the copper market has recently sprung to life, as it is an essential indicator of global economic strength. Look for a favourable resolution of its relationship to gold in the new year. I'm already long Cu stocks.

Copper/Gold Ratio

As for the now long-forgotten indicator du jour, the yield curve, it is steepening nicely this year. Recessions have typically followed monetary tightening inversions. The massive fiscal offset from COVID-19 relief support negated that relationship this time. I think this cycle will soft-land in the 50 to 70% range, as in the early 90s, supporting a continuation of the secular bull market into 2026-27. I don't expect the violent swings of the past three cycles to be repeated, but what do I know? It's not like I saw the Dotcom bust, the GFC or Covid coming!

U.S. Treasury Yield Curve - 2YR vs 30YR Yield Ratio