From a percentage basis, 2024 was a fantastic year for the markets. In this review, we will explore the underlying reasons why 2024 was such an exceptional year for market performance. We will then address the question on everybody’s mind: is this kind of performance sustainable as we move into 2025?
For those who don’t want to read to the end of this newsletter, we will tell you flat out that it is not! 2024 was exceptionally good for big tech companies, specifically the “Magnificent Seven”: Tesla, Apple, Meta, Microsoft, Netflix, Alphabet, and Nvidia. These seven tech companies now dominate the major indices. But why was there such a consolidation of capital and a squeeze to the upside in 2024?
Except for the July to August correction, markets generally squeezed higher until the end of the year. Then we had some brief end-of-year profit taking; we will see if that profit taking turns into a correction.
No Need to Sugarcoat
In short, the markets were driven by US election year politics. In the United States, the incumbent president did everything his administration could do to sugarcoat the economy. Like a sugar rush, the “come down” from the sugar high is usually a sugar correction, to put it mildly. For instance, uncontrolled illegal immigration offset soaring inflation. Labor, being the most expensive cost in the production process, was made cheaper by illegal immigration. Undocumented workers were able to enter the work force easier than in past years buy using applicants to get in to the workforce more easily, by doing delivery type jobs helped reduce inflation by reducing the cost of labor. The Federal Reserve also did its best to increase the money supply by cutting interest rates and making money cheaper to borrow once inflation seemed under control.
In the end, it did not matter what the Biden administration did to sugarcoat the economy. The Democrats were not able to win the election. However, what needs to be dealt with now are the problems caused by an economy that has gotten used to cheap labor and undocumented workers. The incoming Trump administration will now have to deal with these problems. In fact, these problems most likely contributed to his successful election. The question now is, what happens when these undocumented illegal migrants are no longer in the economy? The cheap labor that the economy had been benefiting from will no longer be a factor, so most likely, inflation will return with a vengeance. The Trump administration also proposes to reciprocate tariffs, which will bring a substantial amount of new revenue for the federal government. However, it will be a major change in the revenue model of the US government. As we know, markets abhor change and uncertainty, so at least initially, the market will correct and wait and see how things pan out.
A Bird in the Hand…
Nvidia (NVDA) was most definitely the winner of the year, with a parabolic 3X return due to enthusiasm about AI.
After a year of exceptional gains, specifically in the tech sector, which, as we’ve already explained, did phenomenally well in this sugar-coated economy, it would be prudent to take profits and lock in gains, as we have seen traders and investors doing this December. If you have profits on the table, it’s best to take them and sit on some cash while the new administration implements changes that are long-term good for the United States economy.
The Federal Reserve will do as it indicated in December and pause the rate cuts. In fact, if inflation returns with a vengeance, the Federal Reserve may have to raise interest rates yet again. Expect the US dollar to surge to the upside as tariffs strengthen the US dollar, as foreign countries have to hold US dollars in order to pay US tariffs. Don’t forget that the markets are denominated in dollars. As the dollar strengthens, the value of the companies stays the same, but if the dollar gets stronger and the company’s value stays the same, then stock prices would have to go down.
With all of this taken into consideration, it is a particularly suitable time to take profits and prudently be cautious. US markets have performed incredibly well over the last few years, and it might be a valuable time to adopt a wait-and-see strategy while trading actively. If markets correct, then volatility will increase along with short-term trading opportunities.
