In my last article, I reminded investors that we are bullish on U.S. stocks in the mid and long-term and remain cautiously bullish in the short-term due to higher-than-desired volatility. Higher interest rates, or the expectation of it, create a more challenging environment for stocks. The article concluded that the US economy may be decoupling from the global economy. While the US may enter Phase II in the economic cycle, where GDP and inflation accelerate together, the global economy may enter Phase III, where inflation accelerates and GDP decelerates. Our forecast has not changed. We expect the US economy to fluctuate between Phase II and III during 2025. Volatility increases, and confusion amongst investors reigns during these two phases of the economic cycle. However, the stock market does not enter a bear cycle because the economy is not recessionary. This is important because economic recessions create bear market cycles in stocks. However, not all stock bear markets create an economic recession, but the opposite is always true.
Trade tariffs may add volatility to the already challenging stock market environment. Artificial Intelligence (AI) from China adds sudden and unexpected competitiveness to the American microchip industry. By the way, I was surprised investors last week took the Chinese news at face value. Since when have we believed everything they say? Time will tell. However, the news adds volatility to the stock market but doesn’t change the economic cycle. We expect short-term weakness in stocks due to mega-companies such as Invidia (NVDA), Microsoft (MSFT), and Apple (AAPL) showing weakening short-term uptrends. The same applies to Semiconductors ($JUSSC), which is on a bearish short-term trend.
The question that follows the above paragraph is whether this is the beginning of a bear market. In my opinion, the answer is no. However, this will complicate February’s and perhaps even the first quarter’s (Q1) stock market performance. February is historically volatile, and the above only adds to its negative seasonality. However, GDP growth and inflation are not signaling an economic recession, which could create a bear market in stocks. This is why our portfolio risk management analytical process is pegged to the economic cycle. In other words, even if the news from China is not false, it will not change the short-term economic forecast in the US.
From a macroeconomic perspective, it is worth noting that the US dollar (USD) regained its bullish uptrend last week compared to the Euro, British Pound, Canadian Dollar, Mexican Peso, and Japanese Yen. This move is probably related to the previous week’s ECB’s decision to lower interest rates, while the FED left rates unchanged and pushed future cuts further out. This move speaks about the strength of the US economy. Again, there should be no reason to fear a bear market in stocks if there is no economic recession nearby.
Commodities are mixed. Our Oil ($WTIC) mid-term trend remains bearish, while the short-term trend remains under bearish pressure. It is trying to regain the uptrend, but resistance at $74.5 still prevents such recovery. Copper ($COPPER) is trying to regain its short-term uptrend but is encountering short-term resistance at $4.75. We believe these two commodities are good indicators of global economic growth and provide a sense of what inflation may do. Currently, both can be taken as soft readings, while the CRB and DBC Commodity indexes, corn, and coffee remain in bullish uptrends.
With best wishes,
