The Week Ahead - 2/9/25
A comprehensive look at the upcoming week for US economics, equities and fixed income
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As a reminder, some things I leave in from prior weeks for reference purposes, because it’s in-between updates, it provides background information, etc.. Anything not updated this week is in italics. As always apologize for typos, errors, etc., as there’s a lot here, and I don’t really have time to do a real double-check (it’s a staff of 1).
The Week Ahead
After another very heavy week full of catalysts headlined by economic data, corporate earnings, and continued political landmines, we’ll follow the normal flow of turning to the Fed’s inflation mandate in the US. Politics will of course likely remain a constant risk factor in the near term as the administration continues its “flood the zone” strategy from Trump 1.0 (keep a constant stream of headlines and new announcements which makes it difficult for news outlets and opponents to maintain focus on any particular policy), and Tuesday and Wednesday we’ll have FOMC Chair Powell testifying before Congress. Earnings will continue, although decelerate sharply, and we’ll also get our first Treasury auctions of the month.
In terms of this week's economic data, the clear highlight is Jan CPI on Wednesday. Needless to say, a hot print with a Fed already coming into the month unsure about inflation’s trajectory (and on the heels of a hot wage number and jump in inflation expectations on Friday), will see Fed rate cut bets which were already cut aggressively last week slashed further and take a March cut officially off the table. Bond yields would also likely move back towards the highs of the year. Note Jan CPI also includes a reweighting and update to the seasonal adjustments so it can be a bit messy.
With respect to inflation exp’s while not listed in the calendars below (except Yardeni’s monthly) we’ll also get the NY Fed’s consumer survey this week (which is a more robust survey than UMich (larger, stable sample)) which will give us more color on those. The rest of the week gives us PPI and import prices on the inflation side, NFIB small biz sentiment, retail sales, industrial production, and the weekly reports (mortgage applications, jobless claims, EIA petroleum inventories).
In terms of the Fed in the upcoming week, we’ll get plenty of Fed Governors and regional bank presidents as we normally do, but they’ll all take a backseat to Jerome Powell’s 2-day semi-annual testimony before Congress Tuesday and Wednesday (Tuesday is normally the most important one as it is before the Senate (better, more informed questions) and Powell makes an opening statement which he normally just repeats on Wednesday, but Wednesday comes after the CPI print, so he might comment on that making them both “must watch” (at least the beginning Wednesday, the questioning is normally just a lot of grandstanding other than a few notables such as the Chair French Hill)). In terms of those other speakers, BoA has Hammack (the only dissenter in December (not a voter though in 2025)), Williams, and Bostic. Marketwatch adds Daly, Bowman, Waller, and Logan.
Treasury auctions will also be notable this week with 3, 10 & 30-yr auctions Tues, Wed & Thurs respectively ($58bn, $42bn & $25bn).
4Q earnings will decelerate relatively sharply at least in terms of SPX earnings weight with just 7% reporting in the upcoming week (down from 23% last week and 31% the week before) still though 78 SPX components reporting (according to Factset) with 3 Dow components and 9 >$100bn in market cap (down from 19 last week & 31 the week before) in MCD, VRTX, KO, SPGI, GILD, CSCO, AMAT, DE, PANW, and many others that are just under that threshold, in addition to a number of others not in the SPX (foreign domiciled) like SHOP (Shopify), LRLCY (L’Oreal), SIEGY (Siemens), UL (Unilever), SONY, and APP.
From Seeking Alpha (links are to their website, see the full earnings calendar):
Earnings spotlight: Monday, February 10 - McDonald’s (MCD), Vertex Pharmaceuticals (VRTX), Arch Capital Group (ACGL), ORIX (IX), and ON Semiconductor (ON).
Earnings spotlight: Tuesday, February 11 - Coca-Cola (KO), S&P Global (SPGI), Shopify (SHOP), Gilead Sciences (GILD), and BP (BP).
Earnings spotlight: Wednesday, February 12 - Cisco Systems (CSCO), AppLovin (APP), Equinix (EQIX), CME Group (CME), CVS Health (CVS), and Williams (WMB)
Earnings spotlight: Thursday, February 13 - Unilever (UL), Applied Materials (AMAT), Sony (SONY), Deere (DE), and Coinbase Global (COIN).
Earnings spotlight: Friday, February 14 - NatWest (NWG), Ameren (AEE), and Moderna (MRNA).
Ex-US, it’s a lighter week that will likely be dominated by the interplay between the Trump administration and the international community. We’ll also though get important data in UK GDP, India CPI as well as some countries in the EU and Latin America, and rate decisions from Russia, Philippines, and Peru amongst several countries.
Looking north, the Bank of Canada’s summary of deliberations will offer insight into the central bank’s move to strip all forward guidance from its rate decision due to the uncertainty of Trump’s threat of tariffs.
In Asia, India will be a main focus after the world’s fifth-largest economy unexpectedly reported the weakest growth since the pandemic. Its central bank on Friday delivered the first rate cut in almost five years. On Wednesday, industrial production figures are likely to show India’s activity slowing in December and consumer prices at the start of 2025 easing to the slowest pace since August. Wholesale prices, though, another measure of inflation, likely accelerated. We’ll also get January trade data on Friday. Moving east, Indonesia provides consumer confidence data early in the week, Vietnam provides figures on vehicle sales, and Malaysia releases the final reading of gross domestic product for the fourth quarter.
The Philippines central bank is forecast to cut its lending rate on Thursday by 25 basis points after a decline in rice prices, which have an outsized influence on the country’s inflation readings. In South Korea, the unemployment rate for January, set for release on Friday, will show labor market conditions after joblessness surged to the highest level since 2021 in the prior month. Import and export price figures will provide a look at January demand after trade activity declined. Japanese producer prices likely accelerated on an annual basis and held firm in January from the prior month. On Wednesday, the country also releases preliminary machine tool orders for January, a snapshot of global demand as it’s one of the world’s largest manufacturers of the machines. This measure jumped the most since June in the prior month. Finally, Australia releases several measures of how the nation is feeling, with January business confidence and February consumer sentiment and inflation expectations. New Zealand publishes credit card retail spending, two year inflation expectations, and manufacturing activity. January food prices are also published.
Following Thursday’s move by the Bank of England to cut rates and halve its 2025 growth forecast, data in the coming week will reveal the economy’s performance at the end of 2024. Forecasters are split on how gross domestic product fared in the fourth quarter, with some reckoning on a small contraction of 0.1% while others see either stagnation or even a modicum of growth. BOE speeches will also draw attention, with Catherine Mann — one of two officials who sought a half-point rate reduction — scheduled for Tuesday. Appearances by Governor Andrew Bailey and policymaker Megan Greene are also on the calendar. In the euro zone, industrial production on Thursday is a highlight, along with final inflation numbers from Germany and then Spain the following day. A second reading of the region’s GDP is due on Friday.
Taking the lead among European Central Bank speakers will be President Christine Lagarde, who’ll testify to lawmakers on Monday. Elsewhere in the region, consumer-price data will be a major focus. In Switzerland, the first inflation reading of 2025, due on Thursday, will set the tone for the next moves of the Swiss National Bank, which lowered borrowing costs by a half point in December. January saw cost cuts for electricity that will weigh on inflation, and the median forecast of economists is for an outcome of just 0.4%, which would be the lowest since 2021. Norway’s report for consumer price growth on Monday is anticipated to stay stable at 2.2%, and GDP numbers will be published the following day. Egypt’s central bank on Monday will keep a close eye on inflation. It it continues to slow, in another sign of a firm downward trend, it may enable officials to begin rate cuts in coming months. In Israel on Friday, data will likely show inflation remained above the 3% ceiling of the central bank’s target range for a seventh straight month. Analysts expect it to quicken to 3.8% after unexpectedly slowing to 3.2% in December. A number of central bank decisions are also scheduled:
In Namibia on Wednesday, policymakers will likely reduce their rate for a fourth time in a row as inflation sits comfortably at the lower end of their 3%-to-6% target band.
Zambian officials will probably keep their rate at 14%, with price growth expected to start easing as the impact of last year’s drought and a steep depreciation in the kwacha begin dissipating.
Also on Thursday, the monetary authority in nearby Rwanda may lift borrowing costs high enough to return to a positive real rate.
Serbia’s central bank is scheduled for a decision on Thursday too. Officials may resume easing after four months of keeping borrowing costs steady, though steep energy prices remain a source of inflationary pressure.
The Bank of Russia’s first meeting of 2025 will be closely watched on Friday after it surprised analysts with a hold at 21% in December when many expected a hike to restrain inflation running close to 10%.
The same day, in Romania, the central bank is expected to keep rates on hold as political and fiscal risks cloud the inflation outlook.
In Latin America, Brazilian and Chilean central banks get the week rolling with surveys of economists’ expectations ahead of Brazil’s January consumer prices report. A one-off electricity bill credit is expected to have slowed inflation last month that should reverse in February. Mexico-watchers will pounce on any and all demand and output indicators that may point to the risk of recession. December manufacturing, industrial production and January same-store sales are the highlights from Latin America’s No. 2 economy. Chile’s central bank will post the minutes of its Jan. 28 meeting, at which policymakers kept the key rate unchanged at 5%. Officials are turning more cautious as they ride out a near-term jolt to inflation. Forgive President Javier Milei if he fails to resist yet another victory lap in his scorched-Earth battle to rein in Argentina’s inflation. The early consensus for the January 2025 annual print is for something near 67%, down from 117.8% in December and 289.4% last April. That would be the lowest since June 2022 as monthly readings settle in below 3%. While inflation in Peru’s capital city has slowed below the midpoint of the target range, the core reading - stripped of energy and food costs - remains elevated. With that in mind, the central bank is likely to keep the key rate on hold.
And here’s BoA’s cheat sheets.
And here’s calendars of 2025 major central bank meetings.
Market Drivers
So let’s go through the list of items that I think are most important to the direction of equity markets:
Fed/Bonds
As noted previously this was one of the sections that had grown unwieldy, so I’ve really pared it down. Given I provide daily updates on Fed expectations, Fedspeak, and analyst thoughts on the Fed, it’s duplicative (and time consuming) to gather it all again so, again, I encourage you to look at those (the daily posts) for updates. I will just give more of a quick summary.
I noted six weeks ago,
just a few cuts before a prolonged hold would be consistent with the 90’s “soft landing” experience, and it’s certainly not implausible that inflation gets “stuck” around current levels and growth and labor markets remain in good enough shape keeping the Fed to just one or two (or I guess no) cuts in 2025, but I think it’s also not unlikely that we see continued softening in labor markets and the economy, and with just 18% of investors expecting a recession in 2025, it feels like a growth scare and a quicker path of Fed rate cuts is underpriced.
And three weeks ago
the strong NFP print coupled with a jump in inflation expectations (and a drumbeat of hawkish Fed speakers during the week), markets moved to more fully price the “90’s ‘soft landing’ experience” seeing rate cut expectations dialed back to perhaps one cut (with pricing for none shooting higher as did pricing for a possible hike). I continue to think we’re pushing too far in the direction of no cuts, but until inflation shows some signs of resuming its descent or the labor market shows renewed signs of weakening (which at this point would take more than one month’s data) that’s where I think pricing will stick. So the inflation prints this week are important, but will be taken within that context.
And as noted two weeks ago, we did see softer inflation prints, which did see some unwinding of the move to no rate cuts and jump in bond yields, which continued the following week, particularly after the risk off action in the markets Monday and then a more constructive than expected Jerome Powell at the Dec FOMC who continued to describe current rates as “meaningfully restrictive” and sounded very constructive on inflation noting the past couple of reports had been better and that most of the remaining overshoot over 2% was due to shelter and “non-market based” prices, even as he reiterated the Fed was “in no hurry” to lower rates further. Which is where we came into last week, with two cuts almost fully priced, but things went the other way on a variety of fronts from stronger than expected manufacturing PMI’s to more hawkish Fed speakers and culminating Friday with the overall strong employment report and jump in inflation expectations. The result was about a half of a cut getting priced out.
Despite that, yields fell back for the week particularly at the long end, encouraged by Treas Sec Bessent’s focus on them and signaling that supply would be maintained for at least the next several quarters. So that’s the backdrop for a couple of key items in the upcoming week, the most important January CPI. A hot print will officially take a March cut off the table absent a very unexpected turn in the labor market, although a cool print might not do that much for pricing given recent Fed commentary on wanting to wait until there’s greater clarity on the Trump administration’s policies. There’s also a cohort (Bowman, Logan, Musalem) that don’t think rate cuts are appropriate regardless of what happens with inflation as the strength in the economy demonstrates that rates are not restrictive. So risks are not evenly dispersed in my opinion.
All of which means while yields may drift higher or lower I continue to expect they will be range bound this year until we get greater clarity on Trump policies and the first few months of inflation prints. Those will be key in determining whether we get another bought of residual seasonality which has seen 1Q inflation spike the past couple of years. If it doesn’t the y/y numbers will fall quickly, and might be enough to squeeze one or two more cuts out even if growth doesn’t fall back. So, as I wrote the last few weeks, “For the time being, all we can do is wait for now and see how things progress.”
The 2/10 curve softened considerably this week to +0.20% down -14bps w/w (and -21bps from the steepest since May ‘22 hit Jan 14th). It started the year at +0.33%, so it is down -13bps from there.
As a reminder, historically when the 2/10 curve uninverts following a long period of inversion the economy is either in a recession or within a few months of one. It uninverted in Sept, so this looks officially like a "this time is different" situation.
The 3mos/10yr yield curve (considered a better recession signal than 2/10’s w/the last four recessions on average coming a few months after the curve uninverted (prior to that it generally uninverted after a recession had already started)) also fell back notably w/w -13bps to +0.14% now down -28bps from the steepest since Oct ‘22 hit Jan 14th (but still up +1.59% since Sept 11th). It uninverted Dec 12th.
I have been a broken record that I thought the 2yr #UST yield was too high, trading above the current Fed Funds effective rate (meaning the 2yr was pricing a higher chance for net rate hikes than cuts over the next 2 years). Since then it has softened so that it’s now below, but at -2bps (+13bps w/w), not by much, so I think there’s probably more to go unless the Fed is truly done with rate cuts for this cycle.
Long term inflation expectations (as measured by the 5-yr, 5-yr forward rate (exp'd inflation starting in 5 yrs over the following 5 yrs), specifically mentioned by Powell at the Nov FOMC press conference (he said the metric was “right where it’s been, consistent with 2% PCE inflation”), fell back further this week, -5bps w/w to 2.25%, the least since Dec 20th. They are now -4bps since the Nov FOMC.
10-yr breakevens though were unchanged w/w at 2.42% remaining near the highest since Oct ‘23.
With nominal 10yr Treasury yields falling more than inflation expectations last week, 10yr real rates, after hitting the highest since Oct ‘23 (and before that 2007) Jan 13th at +2.34%, fell another -9bps to +2.04%, the least since early December, though still well above the 2010-2020 peak of 1% (but down from the post-pandemic peak Oct ‘23 of 2.5%).
10yr real rates using 5-yr, 5-yr forward inflation expectations (subtracted from the 10yr nominal yield) similarly fell back again this week -8bps to 2.18% as of Thursday now down -27bps from 2.45% on Jan 13th which was the highest since Oct ‘23 (and before that 2007)), still though well above the 2013-2020 average of around 0.5% (but down slightly from the post-pandemic peak of 2.5% in October '23).
And as a reminder according to BoA the importance of real rates on equity returns has seen the largest increase in the factors they track over the past 5 yrs and explains a larger proportion of stock returns (83% correlation) in their data (to 2006), with the dollar close behind the most correlated (76%) since 2015.
Shorter-term real yields (Fed Funds - core PCE) now down to 1.68%, the least since Sep ‘23. While still the highest since 2007 before that, it’s down from 2.70% in June. (this won’t get updated until the end of the month)
And the real prime rate (using core PCE) continues to edge lower from the 5.9% in June, which was the highest since Sep 2007. Now down -1% at 4.9%, the least since Aug ‘23, still though more than double the 10yr pre-pandemic avg. (this won’t get updated until the end of the month)
And looking out longer term, one thing to note is the FOMC’s long run projection for the endpoint of the Fed Funds rate (the “neutral rate”) is now the highest since Sep 2018 at 3.0% (and not unlikely to go higher as I said earlier this yr). [This won’t get updated again until March].
The ACM model of the 10yr term premium (which is solely based on interest rates) continued to fall back from the +0.66% it hit Jan 13th (which was the highest on this model since May 2015), now at +0.34% as of Wednesday (-14bps w/w), still though the highest since 2023 prior to December, up ~+48bps since the FOMC did the 50bps cut in Sept, but as noted down -32bps in less than a month.
https://en.macromicro.me/charts/45452/us-10-treasury-term-premium
FWIW the the St. Louis Fed 10yr term premium estimate (which runs a week behind and is based off the Kim and Wright (2005) model (which differs from other models in that it incorporates non-yield curve factors such as inflation & GDP) continues to show a higher term premium than the ACM model at +0.68% as of Jan 31st down from +0.80% Jan 10th which was the highest since Apr 2011, but this should soften notably next week based on what the ACM model did this week. It is up +66bps since the Sept FOMC.
The extended discussion on term premium (what it is, why it’s important, etc.), can be found in this section in the Feb 4th Week Ahead.
As the MOVE index of expected 30-day bond volatility edged a little higher from a 1-mth low two weeks ago, still much closer to the lows of 2024 than the highs.
With bond volatility relatively stable (at least according to the MOVE index), 30yr mortgage spreads were unchanged w/w at 2.39%, remaining near the lowest since June ‘22 (2.27%) hit Dec 19th and well off the 3.1% peak in June ‘23. But they are around +67 bps above the 2010-2020 avg level.
Lower spreads (compared to mid-2023) is what has kept 30yr mortgage rates from moving much over 7% like they did in Oct ‘23 (when they peaked at 7.8% according to Freddie Mac), so hopefully they will remain contained.
Chicago Fed National Financial Conditions Index and its adjusted counterpart (the latter attempts to remove the correlation between the various indicators due to broad changes in economic conditions), both of which are very comprehensive each w/105 indicators, in the week through Jan 31st saw the former revised a touch higher but still the least tight since Nov 2021 while the latter remained a tenth off the least tight since then.
https://www.chicagofed.org/research/data/nfci/current-data
As the Fed continues to drain liquidity from the system via QT, I think it’s important to watch for stresses which give an early warning signal that they are perhaps going to far as they did in 2018 which led to a near bear market. One area I am monitoring is reverse repos (which is an overnight secured place institutions (mostly money markets and banks) can park excess funds to accrue some interest designed by the Fed originally to keep excess liquidity from pulling down rates too much in other short term markets). RRP grew rapidly in 2021 & 2022 as money was pumped into the system but since May ‘23 has been steadily drained down by the Fed’s QT program and higher bond issuance with banks discouraged by regulatory rules from taking up the increased Treasury supply.
In particular, the continued sizeable issuance of T-bills (<1 yr duration) of around $800bn/month (accentuated by the $60bn in balance sheet runoff (meaning the Fed has reduced its buying of maturing Treasuries by that amount which the private market has to fill)) drained ~$1.75 trillion from RRP in the year through March 1st. From then until early July RRP levels had remained relatively stable in the $375-$500bn range, but since early July they resumed their decline (in fits and starts), hitting new lows on Dec 20th at $98bn, the least since Apr ‘21 on the back of the Fed cutting RRP rates to the low end of the Fed Funds band which made parking funds there (versus lending overnight to other institutions or buying T-Bills) less attractive in line with their desire to sop up most of this “excess liquidity” (as they have described it).
RRP on Wednesday hit the lowest since Apr ‘21 at just $78bn finishing the week at $95bn, down notably from $188bn the prior week (which I believe was elevated due to month-end).
So for now, I’m not changing my overall take which is that “I expect this to continue its decline given the Fed has made parking funds in RRP less favorable (or at least until the Treasury hits the debt limit and can no longer issue new bonds (just refinance maturing ones)). So for now, it seems there is a cushion to absorb issuance (in addition to the normal buyers).” However that cushion is now back down to negligible levels. I continue to think we may start to see funding stresses emerge as it approaches zero.
In that regard, as noted previously, despite the drawdown in RRP Dallas Fed Pres Laurie Logan (who is an important voice given her extensive experience in the NY Fed's markets group) has said she believes current liquidity is “more than ample” (and the current NY Fed Pres Williams said something similar last year) and said she's looking for RRP to fall to "negligible" levels. As I said then “she's the expert so I'll defer to her, but I continue to be on the lookout for funding stresses now that RRP has crossed below $100bn, and I still think at zero RRP the Fed may need to stop QT to avoid another liquidity shortage as they did in late 2018.”
Also, we’ll have to see how the debt ceiling impacts things. With the Treasury likely to soon start drawing down its General Account (TGA) (Janet Yellen said last week that “extraordinary measures” would start in January), until the debt ceiling is raised the likely consequence is a build in RRP as money markets, etc., need another home for their short-term lending (the Treasury will only be able to roll over expiring debt, not issue new debt to keep up with spending). This was what BoA predicted back in Sept (more below). Their analysis has been pretty accurate (they saw RRP falling to $185bn by YE (about where it is now).
And I noted previously that BoA had pushed pushing back their est for the end of QT to Mar ‘25 (which the noted “could create a funding blind spot for the Fed” in the event the debt limit remains unresolved (you can follow this link and look in this section for more details on that). In summary their thinking was that, similar to 2023, the Treasury’s depletion of its General Account (TGA) when it cannot issue new debt (just refinance existing debt) will offset what would otherwise be a continued drawdown of liquidity. That will keep liquidity stable but will rapidly reverse once the debt limit is ultimately raised (which BoA est’s will again be in July as they assume Congress will take it to the very last second as is their habit), which could lead to a funding squeeze when auctions restart they will need to be resized to “catch up”. That didn’t really cause any issues when it happened May 2023 (the last late debt ceiling extension), but we also had a lot more liquidity in the system (RRP levels were at record highs above $2tn (arrow) but they fell sharply from there, down around -$1.7tn over the next 10 months). We have nothing like that amount of “free liquidity” this time around.
In January BoA pushed the end of QT out again to Sep ‘25 due to “(1) limited volatility in funding markets (2) minimal discussion around balance sheet policy in recent Fed communications, [and] (3) lack of concern around debt limit related dynamics.” Similar to the above discussion, they “think the timing of QT end largely depends on the timing of debt limit resolution and the speed / size of TGA rebuild… We see a summer deal ahead of the August X-date as our base case… Using debt limit assumption of an end-July DL resolution, we assume a QT end date in Sept 2025. It is possible QT ends in July prior to TGA rebuild… We expect the debt limit resolution to trigger a rapid rebuild of the TGA via bill issuance, which will quickly drain ON RRP and eventually reserve balances.”
In terms of their specific forecasts they think once the debt limit is raised we’ll see “$468b in bills issued and $470b in TGA rebuild liquidity drain, over 6x the pace of monthly QT in only 2 months. At this point funding pressure and volatility in funding rates will likely lead the Fed to end QT. The pace and magnitude of the TGA rebuild will be important for funding markets. A slow TGA rebuild & lower terminal TGA value will mean a more gradual liquidity drain and more limited funding pressures. A faster rebuild & higher TGA value will mean more acute funding pressure post debt limit resolution.”
They think that “most of the TGA rebuild will initially pull cash out of ON RRP [which they think will have rebuilt to $350bn] since TGA rebuild will likely see higher bill supply at cheaper front-end rates. Cheaper bill rates will draw MMFs cash out of RRP. Once the RRP reaches $0 the remaining drain will come out of reserves. Once QT ends for USTs, we expect the Fed to continue to roll off prepaid and maturing MBS but reinvest MBS into UST bills”.
BoA FWIW believes “the Fed should have ended QT by end ’24 to prevent an unintended over-draining of sysstem liquidity. We believe a Fed that continues QT into Q3 will see money market volatility + potential bank liquidity concern as TGA is rebuilt. The Fed’s justification for continued QT seems to be a belief that (1) banks demand fewer reserves than we expect ($3-3.25tn) (2) their liquidity adding repo tools are sufficient to keep money market pressures contained. We are skeptical on both. Longer QT risks over-draining & cheaper front-end USTs in Q3 ’25.”
So, in summary, until the debt ceiling is raised, BoA sees liquidity stresses being forestalled, but once it is they think we will quickly see RRP drain to zero necessitating an end to QT.
The reason monitoring RRP is important is that once it’s gone, it’s expected to begin to pressure bank reserves (absent some other buyer shall as stablecoins which have been a buyer of T-Bills) to absorb any extra debt issuance, etc., that is not sold to foreign and domestic buyers. However, banks have been loathe to part with reserves beyond the $3tn level. For now, they remain comfortably above that (Jerome Powell noted last week that the Fed is watching for reserves to "approach levels that are somewhat above ample," meaning they see them as more than sufficient at current levels) at $3.23bn, up +$30bn w/w.
I’ve noted previously that it seems that as long as reserves remain above the $3tn level (which is where we saw indigestion in the credit markets in March ‘23 (which contributed to the banking issues (SVB, etc.)), it seems they indicate more than sufficient liquidity in the system.
Overall, bank reserves are just -$130bn below June 1, 2022 levels ($3.36tn), when the Fed started QT, a better result than even the most optimistic estimates at the time.
For background on various estimates of when reserves will be “too low” see the Feb 4th Week Ahead.
Getting back to rates, I said 10 months ago 2-year Treasuries were a good buy at 5%, and as I noted once the Fed started its cutting cycle the ship has likely sailed on seeing those yields anytime soon (meaning years). In terms of 10-yr’s I had advised then grabbing some at 4.7% which I had thought seemed like something we wouldn’t see anytime soon, but as I noted six weeks ago
the Fed saying the ‘recalibration phase has ended’ along with concerns about sticky inflation cropping back up and now questions about the inflationary impact of some of Donald Trump’s policies, has seen rates just about back there. I still am not sure we see 5% absent another ‘something new’ (like the Fed becoming even more aggressive (for example due to Dec’s data coming in hot (payrolls and CPI/PCE prices)).
And I noted three weeks ago
we once again did get “something new” in the strong payrolls print (which came along with an unexpected jump in consumer inflation expectations). That has pushed 10-yrs above the 4.7% level, perhaps now on their way to 5%. There are a lot of institutions that have said they’re buyers at that level, so we’ll see what happens if we get there. I certainly will be picking some up. That said, IF the Fed is truly done with the rate cutting cycle (which I don’t expect), then the 10yr yield should really be somewhere in the 5.3-5.5% range.
But last week “with the cool inflation prints and more constructive than expected Jerome Powell, some of the steam was taken out of the rally in yields, so for now we can just watch and wait.” But we did get another “something new” with the comments from Treas Sec Bessent noted above as well as his sticking to the auction schedule set up by Sec Yellen, likely confirming that we’re in a trading range between 4.1 and 4.8% on the 10yr for now. The 2yr will likely not see a lot of movement unless we get some big movement in Fed rate cut (hike?) expectations.
But in terms of much lower yields, as I said four months ago, we have probably seen the lows until we get a recession:
“while we didn’t quite see 3.5%, I think 3.6% is close enough, and I think we might have been at or near the lows at this point, particularly as the Fed has been raising their neutral rate estimate. If the endpoint for Fed Funds is around 3% (or higher) then it’s hard to see the 10yr trading much lower absent a recession. Similarly 2yrs at 3.6% seem to be very rich and almost certainly too low absent a recession consistent with my statement last week.” In short I’d expect to see 4% on these before we see 3.2%:
At around 3.6% on both the 2 & 10yrs absent a recession I think there’s not much value in either (I’d rather park my cash in short term Treasuries (0-3mths) or safe dividend paying stocks with a track record of growth (dividend aristocrats, etc.) at these levels.
For all the old “final hike” and “first cut” materials, you can reference the Feb 4th blog post.
BoA updated their FOMC Dove-Hawk Chart. Note it’s missing Hammack in ‘26 (Cleveland and Chicago vote every 2 yrs), but otherwise looks right. Also note that Philadelphia Fed Pres' Harker’s term is up next year (which is why they don’t have a name for Philadelphia), something I didn't realize.
I think this now needs some dramatic changes with Hammack (who dissented voting for no cut in Dec) clearly one of the most hawkish members, Daly at best a Centrist as she sees only 2 cuts in 2025, and perhaps Collins as well. Goolsbee is clearly the most dovish of the members currently.
And I came across one from BBG. I think it’s pretty accurate except Kashkari is definitely not that hawkish (he was calling for a December cut in early November):
And here who is rotating off and on for 2025.
Earnings
As a reminder, I have removed most of the background material, which you can get in the Feb 4th blog post. As you know I’ve moved on to 4Q and beyond. You can reference this post from 12/1/24 for stats on 3Q.
From Factset:
With 62% of SPX earnings in for Q4, Factset says 77% have beaten exp's (unch w/w), equal to the 5-yr avg of 77% but above the 10-yr avg of 75%, and those beats have improved to +7.5% above exp’s (from +5.0% the prior week) still below the 5-yr avg of +8.5% but above the 10-yr avg of +6.7%. This has pushed up earnings estimates a big 3.2% w/w to +16.4% (up +4.7% the past four weeks), and up from +11.8% at the end of the 4th quarter. This would be the most growth in three years and would mark the 6th consec quarter of earnings growth.
As we’re seeing, it’s normal for there to be a “beat” which sees actual earnings surpass estimates as of the end of the quarter (only 3 times in the past 40 quarters has that not happened (Q1 ‘20, Q3 ‘22, Q4 ‘22) according to Factset. The estimate at the start of the quarter was +11.9%. The 10-yr avg has seen a lift of +5.4%, 5-yr is better at +7.1%, but the past 1-yr has only been +2.2%. That would mean even at the low end earnings growth would end up over +14%, at the high end around +19% (!).
In terms of Q4 revenues, 63% of SPX reporters have beaten est's (unch w/w), below the 5-yr avg of 69% and 10yr avg of 64%, and they are just +0.9% above est’s (unlike earnings unch w/w) well below the 5-yr avg of +2.1% and 10yr avg of +1.4%. Still, Factset says SPX co’s are expected to see revenue growth of 5.2% y/y (+0.2% w/w), equal to the +5.2% on Sept 30 but up from +4.6% at the end of the 4th quarter. It would mark the 17th consecutive quarter of revenue growth for the index.
In terms of profit margins, Factset says SPX co’s are expected to report net profit margin of 12.5% for Q4 (+0.4% w/w), now above the previous quarter’s net profit margin of 12.2%, the year-ago net profit margin of 11.3% and the 5-year average of 11.6%.
While Q4 earnings increased notably, 2025 quarter-by-quarter earnings decreased materially this week according to Factset.
Q1 ‘25 fell -1.4% to +8.7% (-5.4% last 14 wks), Q2 ‘25 down seven tenths to +10.2% (-2.9% last 14 wks), Q3 down four tenths to +14.5%, and Q4 down a big -2.8% to +13.3% (-3.3% the past 2 wks).
With Q4 earnings expectations increasing materially, FY ‘24 exp's according to Factset rose $1.27 to $240.64 (from the lowest since 2023), representing +10.1% growth (up +0.7% w/w). Looking further back, it remains down just around -1.8% from July 1, 2023, much better than the typical -6% or so drop we historically see.
2025 earnings expectations though with the quarter-by-quarter numbers deteriorating materially, fell to the least in 2 yrs at $272.10 (-$1.53 w/w, now just +12.0% growth (down -2.3% w/w & down ~-4.8% since Sept 1st)).
FWIW 2026 earnings are exp’d to grow 13.6% (down -0.1% w/w).
In terms of the earnings growth exp’d for 2025 Factset notes it will be a record, although also notes that there is on average over the past 25 yrs a -6.3% deterioration from where it starts the year ($275.05) w/analysts overestimating in 17 of those yrs (which would equate to $257.72 based on the average deterioration). But it should be noted that average includes 4 outlier years (2001, 2008, 2009 & 2020) where the overestimation was b/w 27-43% due to recessions. Excluding those, the difference is just -1.1% (which would equate to $272.02 (a little below where we are now)).
In terms of how markets are handled earnings beats & misses for 4Q, looking 2 days before to 2 days after an earnings release, Factset sees a big change from last week with beats going from +1.5% down to just +0.3% well below the 5yr avg of +1%, and misses are now punished slightly more than average at -2.4% (from -2.2%) vs 5yr avg of -2.3%).
Factset’s analysis of analyst bottom-up SPX price targets for the next 12 months as of Thursday was up +66pts w/w to 6,888 (+13.2% from Thursday's close), now up ~1,855 points over the past 45 weeks.
Tech (+18.3% (down from 18.7%)) remains the sector with the largest upside seen by analysts, followed by Energy (+18.1%) while Consumer Staples replaces Consumer Discr as the sector expected to see the smallest price increase (+7.2%) followed by Financials (+7.6%).
As a reminder the last 20 yrs they have been on avg +6.3% too high, but note they underestimated it five of the past six years (including 2024).
In terms of analyst ratings, buy and hold ratings continue to dominate at 54.6% & 39.6% (from 54.7 & 39.4% respectively last wk (sell ratings down one tenth to 5.8%)). That 54.7% in buy ratings is down from 57.5% in Feb ‘22.
Energy (63%), Communication Services (63%), and Information Technology (61%) sectors have the highest percentages of Buy ratings, while Consumer Staples (41%) has the lowest percentage of Buy ratings. Industrials and Utilities have the most sell ratings (8%).
And some other earnings stuff:
Economy
Over the past 2+ years part of my earnings optimism has been due to the economy holding up better than expected. While earnings only track the economy loosely (and markets look forward 6-12 months), there is a clear positive correlation between the economy and earnings (particularly a weak economy and weak earnings), and there is a very strong correlation between earnings and stock prices (although stock prices (being as noted forward looking) generally fall in advance of a recession and bottom 6-9 months before the end of one). So if you can see a recession coming it is quite helpful, although very difficult (especially ahead of the market). You can reference this Week Ahead (see the Economy section) for a lot of material on how every recession is preceded by talk of a “soft landing” as close as a month before the start. That report also has the notes about how small caps have shorter debt maturity profiles and more of it (debt).
As I’ve been stating since I switched to the Week Ahead format in mid-2022, the indicators to me are consistent with solid (which at times has been robust) economic growth, and I have been a broken record that I “certainly do not think we’re on the verge of a recession (although as noted above every recession starts out looking like just some economic softening).”
This week again the data continued to show signs of stronger growth following the more mixed performance we’d seen in late November/December. Both manufacturing PMIs moved into expansion for the first time together in nearly 2 yrs in Jan, the services PMIs decelerated but continued to expand, Dec JOLTS saw a big drop in job openings but quits and hires rose while layoffs remained low as did weekly jobless claims, Jan ADP and NFP payrolls were soft but the rest of the NFP report was quite strong although continued to see job growth concentrated in health care and government jobs, 4Q productivity decelerated but remained solid (a “free lunch” for the economy), we got a confirmation of strong business cap ex orders from Dec, and Dec construction spending was much stronger than expected boosted by residential construction. Offsetting that somewhat was a fall in Dec exports, very weak Jan auto sales, a big jump in Dec consumer borrowing, and weak Dec transportation orders (Boeing).
So for now I don’t see any changes to my overall takeaway on the economy from 18 weeks ago that “the situation continues to seem like manufacturing is subdued but trying to bottom [and seems now to be growing], housing perhaps has inflected off the bottom [although the resurgence in mortgage rates remains a headwind], labor markets (and the services sector and construction in particular) are solid with very healthy wage growth, and productivity appears to be robust (this can make a big difference in allowing the economy to expand without triggering inflation)…I continue to feel that any softening does not appear to be morphing into a recession.”
And as I said 23 weeks ago:
without question, the evidence is building that the days of >3% real GDP growth are behind us (although we got there in Q3), and we should be happy to settle into something more around trend (1-3% real (infl adjusted) growth). That though is far from a disaster. The important thing will be to see the softening level out (L-shape) rather than continue to fall turning the “soft landing” into a recession.
So far that’s what we’ve seen.
The Citi Economic Surprise Index fell back -4.7 pts w/w to +7.7, down now -14.8 pts from the highs of the year (22.5) three weeks ago (and further (-35.6pts) from the December highs (43.3)), still though up +9.4 pts this year after falling to the least since Sept and into negative territory on Dec 31st.
The 2024 high was 47.2 (in Feb) and the low -47.5 (in July).
https://yardeni.com/charts/citigroup-economic-surprise/
And GDP estimates are for now consistent with a no recession call (again though remembering GDP going into recessions generally doesn’t look like one is coming (it was up around 2% in Q2 & Q3 2008 well after the recession had started)). After Q3 was revised up to 3.1%, Q4 decelerated but still above trend at 2.3%, and the trackers that have initiated Q1 tracking are currently looking for around that in Q1 (although it’s very early).
Goldman as of Thursday had dropped their 1Q GDP tracking estimate three tenths to 2.3%, six tenths below Atlanta Fed (who has been dead on the 1st estimate the last two quarters). FWIW Goldman has been two tenths above the 1st estimate the last two quarters.
Atlanta Fed (who was right in line in its 3Q & 4Q est’s of #GDP (and just a tenth off for 2Q from the 1st est)), first raised its 1Q ‘25 GDP estimate by a point to 3.9% before taking it back during the week so ending the week unchanged at 2.9%.
BoA (who as a reminder was right on for 4Q GDP vs the 1st estimate and two tenths high for 3Q), still hasn’t released their 1Q tracking.
NY Fed’s 1Q #GDP Nowcast (as a reminder, they had 2.56% for 4Q vs 2.3% 1st est (they were off a similar amount for 3Q)) edged up two tenths to 3.12% as the stronger than expected ISM manufacturing report and revisions to past data more than offset mild subtractions from trade data, NFP, and JOLTS.
As a reminder, the NY Fed’s model is dynamic and so adjusts in real time as data evolves, and “parameter revisions” subtracted -0.01%.
And the St. Louis Fed GDP tracker, which has mostly undershot actual real GDP since Q2 ‘22, but which was right on in Q1 & Q4 2024, hasn’t updated its Q1 ‘25 yet.
The Weekly Econ Index from the @DallasFed (scaled as y/y rise for GDP), which runs a week behind other GDP trackers, in the week through Feb 1st fell to 2.49% from 2.79% in the prior week (rev’d from 2.82%) falling back into the top of the 2024 range (1.49 - 2.66%) that it left only twice during 2024 but which it has been above the last two weeks in 2025.
The 13-wk avg continued its steady improvement now up to 2.40%, the best since 2022, evidencing overall economic momentum that is accelerating above trend.
https://www.dallasfed.org/research/wei
Other economy stuff:
Valuations
Like the other sections, I’ll just post current week items regarding the multiple. For the historical stuff, see the Feb 4th blog post.
With equities little changed, forward P/E’s were mostly as well despite the material decline in 2025 earnings expectations, although the megacaps saw continued softening:
-The SPX forward P/E at 21.8 for a 3rd wk (still just -0.5pts from the highest since mid-'21).
-Mid-caps (S&P 400) at 16.1 (down -1.0pt from the highest since early-’21 (17.1)).
-Small caps (S&P 600) at 15.8 (down -1.3pts from the highest since early-’21 (17.1)).
-Yardeni's “Megacap-8” (adds NFLX) P/E down to 28.7, now just +2.3pts from the 26.4 it hit 18 weeks ago which was the least of 2024, now further from the 31.5 it hit 26 wks ago (which was the highest since Jan ‘22).
https://yardeni.com/charts/stock-market-p-e-ratios/
Other valuation stuff:
Breadth
Breadth which was looking great two weeks ago, deteriorated for a second week since then.
The McClellan Summation Index ("what the avg stock is doing")continued to improve this week hitting a 7-wk high (after hitting the least since Nov ‘23 five weeks ago).
% of stocks over 200-DMAs edged lower last week.
% of stocks above 50-DMAs, like those over 200-DMAs, also fell back remaining well off from where we were entering December.
% of stocks above 20-DMAs also edged lower.
Value/Growth continued to fall back from the 6-wk high two weeks ago closer to the least since Jan ‘22 just off the lows of the year.
The equal-weighted SPX vs cap weighted ratio like value/growth hit a 6-wk high two weeks ago before falling back towards the all-time lows hit in July but remaining (so far) off the lows of the year.
Unlike value/growth or the equal-weight/cap weight ratios, IWM:SPY (small caps to large caps), didn’t spike two weeks ago (DeepSeek day) and remains not far from the least since July (which was the least since 2000).
Equity sector breadth based on CME Cash Indices deteriorated last week with just 3 of 11 sectors green, down from 5 the prior week, (and 9 the week before that, although the same as the 3 the week before that), with five sectors down more than -0.7% (vs four the prior week and none the week before that). And just one sector up over 1% (down from four the prior week). At least none this week down over -4% (two the prior week). The worst was Cons Discr on the drops in Tesla and Amazon.
SPX sector flag from Finviz consistent w/very mixed performance across the Mag 7. Huge losses in TSLA (-11%) 7 GOOG (-9%). AAPL & AMZN both down over -3% while NVDA was +8%, META +3.7%. LLY also a big gainer +8%.
Other breadth stuff:
Flows/Positioning
Overall global flows from BoA (EPFR data): $46.8bn to cash, $16.6bn to bonds, $2.2bn to crypto, $0.1bn to gold, $0.6bn from stocks
Here were some more details. It was the first January outflow for EM shares since 2016, while cash, Treasuries, US (and large cap) stocks all saw record Jan inflows (global stocks most since 2018).
Bank loans again topped the FICC table of flows by % of AUM by a wide margin (4th wk in a row, and 18th consec inflow).
ICI data on money market flows saw a +$44.2bn inflow in the week through Feb 6th, in line with the +$46.8bn EPFR saw.
ICI data saw ~+$962bn in 2024 and +$1.15tn in 2023. Total MMF assets are at a record $6.92tn. Institutional gained +$20bn) with retail seeing +$24bn). In terms of totals, 60% is institutional, 40% retail.
Looking at CTA (trend follower) US equity positioning, BoA didn’t have a lot this week just noting that “CTAs may have room to add to longs next week, especially in the Russell 2000 and S&P 500.”
So, after modest buying last week in SPX & RUT taking net length to the highest of the year, BoA’s model sees that likely continuing in the upcoming week with minimal scope for selling.
Price trend strength is now strongest for the $SPX at 44% up from 37% last week while #NDX is little changed at 43% (from 42% but down from 61% four weeks ago), while the $RUT lags at 10% but that’s up from -2% last week and -19% three weeks ago). #Japan’s #Nikkei225 fell back to 11% (from 31%) while the Euro #Stoxx50 is at 85% (and positioning at the 90th %ile since 2015).
In terms of gamma positioning, BoA says “SPX gamma was quite steady this week and averaged +$5bn, roughly in line with the week prior. Through Thursday’s close SPX gamma was long $3.8bn (27th 1y %ile). However, while gamma is minimal now, the current gamma profile suggests that all else equal if the S&P rallies next week, then SPX gamma could climb swiftly (e.g., reaching +$7-12bn near an S&P level of 6170 or ~2.4% up from here).”
So BoA sees us back to the normal situation where gamma will increase (a lot) on positive moves in markets until the 6200 level (dampening volatility), but it also continues to see the odd situation where a move under 6050 will also see gamma increase (much less though). Gamma falls on a move under 5950 but not particularly sharply meaning we should be in a positive gamma environment next week unless the wheels completely fall off. That said, unless we rally gamma is relatively low (which means it doesn't provide a lot of volatility dampening at current levels).
BoA est's that the rally in bonds was in part due to risk parity upping their allocation at the expense of equities while commodities moved to 6-mth highs. Bonds continue to be heavily overweighted overall.
#oott
BoA est’s that volatility targeters (vol control), after having been big sellers six weeks ago, but little change in their positioning since then, edged their net length to the highest since that selloff. With equities remaining a little less volatile last week (the major indices were little changed), we could see them continue to rebuild long positions (BoA sees some modest buying Monday).
And I like to look at the notional value in leveraged ETF’s as a barometer of risk appetite. BoA says they’re around the lows of the year “decreasing slightly last week”.
And after buybacks ended 2024 at a record, BoA says they’ve started off the year strong keeping the rolling 52-week average at a record high.
But Goldman says announcements have been scarce with companies using the cash for capex and dividends.
And some other notes on positioning:
Sentiment
Sentiment (which I treat separately from positioning) is one of those things that is generally helpful when its above average (“it takes bulls to have a bull market”, etc.) and when it’s at extreme lows. Sentiment measures were mixed again this week with some improving and some deteriorating, but most are not at extremes, so no clear picture here.
The 10-DMA of the equity put/call ratio (black/red line), after plummeting last week to the lowest since July (which was the least since Apr ‘22), rebounded but still around the lows of 2024 indicating investors continue to look for upside vs downside protection.
When it’s increasing it normally equates to a consolidation in equities and increase in volatility and vice versa.
CNN Fear & Greed Index down -7pts w/w to 39 (it hit 37 Mon, a 2-wk low), moving back into “Fear” from “Neutral”. It was at 73 (“Greed”) a year ago.
Looking at the components:
Extreme Greed = None
Greed = None
Neutral = market volatility (VIX & its 50-DMA); junk bond demand (from Greed);
Fear = market momentum (SPX >125-DMA); safe haven demand (20-day difference in stock/bond returns) (from Greed); 5-day put/call options (from Greed); stock price breadth (McClellan Volume Summation Index) (from Neutral)
Extreme Fear = stock price strength (net new 52-week highs)
https://www.cnn.com/markets/fear-and-greed
BofA’s Bull & Bear Indicator (a global metric), rose for a 5th wk (after falling for 12 straight), +0.2pts, now 4.1 ("Neutral"), but up just 1.1pts from 3.2 five weeks ago which was nearly a 1-yr low, on “on inflows to HY & EM bonds, bullish hedge fund positioning in oil, rolling impact from bullish BofA Jan Global FMS.”
Helene Meisler's followers remained bearish for a third week (and fourth in five), the longest streak since June, after breaking a 9-wk streak of bullishness (the longest stretch since 2021), although slightly less bearish than last week’s 38.9% up votes (which was the most bearish since last March) at 42.1% voting next 100pts up. As a reminder this group is generally not a contrarian indicator.
Link to Helene’s always insightful Saturday Chart Fest. Note it normally includes Citi’s Panic/Euphoria Index which has now edged off the highest in the past year+ but remains firmly in Euphoria.
As a reminder, “[h]istorically...euphoria levels generate a better than 80% of stock probabilities being lower one year later.” In that regard, it first entered euphoria in late March (when the SPX was around 5200) and then reentered in late October (around 5800).
5200 would be a drop of -14% by late March. Could happen I suppose.
Seasonality
As noted last week, “as we move into February, we enter one of the weakest, if not the weakest, months for seasonality in the 4-yr presidential cycle (Feb of Yr 1). But we did have an up January at least, which bodes well for the full year. On average though February is only up 46% of the time historically with a -2.1% average loss for the month in Pres yr 1 (and it’s not much better for an average February). Note much of the weakness is backloaded.”
Of course, as always remember that seasonality is like climate. It gives you an idea of what generally happens, but it is not something to base your decision on whether to bring an umbrella (as the Santa Rally showed us).
BoA (Ciana): "In Y1 of the US Presidential Cycle, the average trend is lower through February, basing in March and a summer rally" Feb in USPC Y1 is one of the weakest months of the cycle, up just 46% of the time w/an avg return of -2.1%.
BoA: Since 1928, first 10 days of Feb not bad w/avg return of +0.33% and median of +0.57%, up 57% of the time w/the 2nd lowest standard deviation (after last 2wks of the yr). But last 10 days 3rd weakest of the yr w/-0.32% avg return and -0.24% median, up just 45% of the time.
And as we consider seasonality, a really nice post from Callie Cox about how you need to take historical analogies w/a grain of salt (unless you've dug into the history). Her chart on Presidential election yr performance w/ & w/o 2008 (when the SPX was -17% in Oct) is a wonderful example.
https://www.optimisticallie.com/p/a-history-lesson
For references to all of the “up YTD through Feb” see the March 3rd post. For all the very positive stats through March (strong 1Q, strong two consec quarters, etc.) see the April 14h post.
For the “as January goes so goes the year”, see the February 4th Week Ahead.
Final Thoughts
I noted five weeks ago,
As we turn the page into the new year, we’re presented with a very different backdrop than what we saw for much of 2024 when the Fed was moving from hiking to cutting, bond yields were falling, seasonality was mostly favorable, systematic positioning was mostly a tailwind, political risk was low, valuations had room to grow, liquidity was very robust, the economy was firing on all cylinders, volatility (until early August) was more subdued, earnings were rebounding, etc… but since the very strong September employment report (followed by sticky inflation reads) the road has been much tougher. In fact since the Sept employment report (Oct 4th) the SPX is up 5% (not terrible of course).
Now we’re in what is historically a more challenging year (1st year of a Presidential term and 3rd year of a bull market following two 20% years) with valuations well above where we started 2024, high expectations (judging from analyst SPX forecasts), higher volatility and political risk…higher bond yields (particularly real yields), a Fed talking more about fewer than more cuts and continuing to drain liquidity that is now hitting levels we’ve run into issues in the past, high earnings expectations, etc.
It doesn’t mean that we can’t have a good or even a great year. Balance sheets remain very solid as does the economy and labor markets (even if slowing), earnings are expected to be very good, buybacks are expected to be a continued tailwind, there’s a lot of scope for the Fed to become less hawkish, the upcoming administration may provide big tailwinds in tax cuts, deregulation, etc., etc. But we need to see all of those come through, and disappointments are not going to be welcomed given the set-up, so my expectation is for choppier markets more like we’ve seen since October than what we saw before.
And that’s mostly what we’ve seen since then (some upside but it’s been very choppy with a lot more volatility and headline risk). The year so far has been “chock full of catalysts,” as I noted a few weeks ago between earnings (which we seem to be navigating pretty well although 2025 expectations took a big whack this week), what comes out of the incoming Trump administration (which we continue to be in the teeth of), the Fed (who has actually become less important with both the chance of cuts and hikes in the near term low), and economic data (which on balance has been supportive). Valuations have come down a (little) bit, and breadth has improved (also a (very) little bit). Buybacks though are starting to resume and systematic positioning is well off the highs giving room for buying. That makes what comes out of Washington a key wildcard, and of course we’ll get important inflation prints this week. As noted earlier, a hot CPI print could send yields back towards the highs of the year which would likely be bearish for equities. But outside of that and unexpected negative surprises from the White House, the other tailwinds may continue to push us higher at least until the following week when we get another key catalyst in Nvidia earnings.
But as always just remember pullbacks/corrections are just part of the plan.
Portfolio Notes
I’ve decided to clean up the portfolio, trying to take it down to 50 (or hopefully fewer) positions to force me to stick with only my highest convictions (and make life simpler).
This week sold out of FRT, ARE, trimmed heavily GOOGL, F, NSANY, ILMN, SIG, also trimmed IMBBY, BBVA, PFE, GRFS, CI, RBGLY, VNQI, ARCC.
Bought HON, GBDC, CPER, O, SLV, AES, VOD, OCSL, PYPL
Cash = 30% (held mostly in SGOV, MINT & BOXX (BOXX mimics SGOV but no dividend, all capital appreciation so get long term capital gains if you hold for a year) but also some non-TBill (>1yr duration) Treasury ETF’s (if you exclude those longer duration TBill ETF’s, cash is around 11%)).
Positions (after around the top 20 I don’t keep track of their order on a frequent basis as they’re all less than 0.5% of my portfolio).
Core positions (each 5% or more of portfolio (first 2 around 10% each, total around 25%) Note the core of my portfolio is energy infrastructure, specifically petroleum focused pipelines (weighted towards MLP’s due to the tax advantages). If you want to know more about reasons to own pipeline companies here are a couple of starter articles, but I’m happy to answer questions or steer you in the right direction. https://finance.yahoo.com/news/pipeline-stocks-101-investor-guide-000940473.html; https://www.globalxetfs.com/energy-mlp-insights-u-s-midstream-pipelines-are-still-attractive-and-can-benefit-from-global-catalysts/)
EPD, ET, PAA, SHY
Secondary core positions (each at least 2% of portfolio)
ENB
For the rest I’ll split based on how I think about them (these are all less than 2% of the portfolio each)
High quality, high conviction (long term), roughly in order of sizing
ENB, CTRA, GILD, GOOGL, PYPL, SCHW, PFE, ARCC, AM, TRP, T, XOM, SHEL, JWN, CVS, TLH, FSK, TFC, NTR, GSK, EQNR, CMCSA, APA, DVN, OXY, RRC, JWN, RHHBY, E, ING, VZ, VSS, VNOM, SLB, MPLX, BTI, KMI, VOD, CVX, ING, O, KHC, ADNT, STLA, NEM, CCJ, AES, BWA, BMY, HBAN, VICI, DGS, ADNT, WES, MPLX, CVE, MTB, BAYRY, SOFI, BEP, BIIB, SAN, TEF, SCHD, KVUE, KT, SQM, ALB, KIM, F, MAC, MFC, GPN, CI, LYG, ORCC, LVMUY, EMN, NVDA, BCE, KEY, OCSL, BAX, SNOW, RTX, PANW, ETSY, BAC, GD, UPS, EA, SIG, BUD, VALE,
High quality, less conviction due to valuation
Higher risk due to business or sector issues; own due to depressed valuation or long term growth potential (secular tailwinds), but at this point I am looking to scale out of these names on strength. These are generally smaller positions.
ILMN, AGNC, FXI, LADR, URNM, URA, STWD, PARA, CFG, YUMC, ORAN, KSS, CHWY, TIGO, TCNNF, TCEHY, JD, WBA, ACCO, KVUE, KLG, CLB, HBI, IBIT, UNG, EEMV, SABR, NSANY, VNQI, ST, SLV, WBD, BNS, EWS, IJS, NOK, SIL, CURLF, WVFC, VTRS, NYCB, ABEV, PEAK, LBTYK, RBGLY, LAC, CMP, CZR, BBWI, LAC, EWZ, CPER, MBUU, HRTX, MSOS, SIRI, M, CE,
Note: CQP, EPD, ET, MPLX, PAA, WES all issue K-1s (PAGP is the same as PAA but with a 1099).
Reminder: I am generally a long term investor (12+ month horizon) but about 20% of my portfolio is more short term oriented (just looking for a retracement of a big move for example). This is probably a little more given the current environment. I do like to get paid while I wait though so I am a sucker for a good well supported dividend. I also supplement that with selling calls and puts. When I sell a stock, I almost always use a 1-2% trailstop. If you don’t know what that is, you can look it up on investopedia. But that allows me to continue to participate in a move if it just keeps going. Sometimes those don’t sell for days. When I sell calls or puts I go out 30-60 days and look to buy back at half price. Rather than monitor them I just put in a GTC order at the half price mark.
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