Here's the Deal - January 13, 2025

Economy: In Slowdown

Market Cycle: Under Pressure

_{Week 2 of 52 for 2024: 3.85% of the way through 2025}

Weekly Note:

It was a week of good news for the economy. Unfortunately, at this phase of the cycle good news is actually bad news.

The first bit of good news came out of the surprising agreement between the dockworker’s union and shipping companies which will avert the strike at ports on the east coast and Gulf of Mexico. The result of which will be a major help in the fight against inflation this year.

Even more surprising was that the ILA gave full credit to Donald Trump for his assistance in averting the strike. Once again proving that like Trump or not, at times he certainly has the Midas touch.

However, what markets really did not like was the much stronger than expected jobs reports last week. As JOLTS and employment came in hotter than expected as the unemployment rate ticked down 0.1%.

So, why is good news for the economy bad news at this moment in time? Because it shows an economy heating back up at a time when the fight against inflation is still not over as it is once again beginning to trend higher. The better the data is during this time, the worse it is for the fluidity of the economic system.

Think of it like constantly driving your vehicle as fast as you can with the majority of your stops being hard stops. Sure, you can do it. However, eventually it will cost you much more as you will burn more gas, severely hamper the longevity of your vehicle by putting unnecessary constant stress on the vehicles components, eventually leading to the vehicle to break down far earlier than it would have if it weren’t driven so recklessly.

There is a cost to everything. And at the moment the cost to a hot economy is more inflation and increased time and difficulty to turn it around during the Stabilization and Recovery phase of the next credit cycle.

This Weeks Market Performance

The Economic Slowdown is proving to be as deceptive as usual, as we are now getting multiple conflicting indicators in the first couple of weeks of the new year.

While the Santa Claus Rally failed to materialize, January’s First Five Days offered better results, although less clear than you would like to see. While the S&P, Nasdaq, and Russell ended the first five days positive, the Dow ended slightly negative. Considering that it was the Dow that ended negative, it’s enough to be concerned as it arguable holds more weight than the other three indices when forecasting.

Even more concerning is that the December Low Indicator was violated last week. This is another great indicator from Stock Trader’s Almanac which states that when the low for the Dow Jones Industrial Average closes below the low of December at anytime in the first quarter of the new year, it is a major red flag for the yearly performance of markets.

Truth is, even if all the indicators fail, that doesn’t necessarily mean that markets crash from here as it is the yearly result which counts. Meaning markets could still run 10-15% in the first half of the year, and then fall 15%+ before the end of the year, putting markets into negative territory to close out the year.

How the S&P and Nasdaq handle the 100day moving average (gray line on charts) will be telling for the strength/weakness of markets in the months ahead. It is certainly concerning that the DJIA failed to hold its 100day and appears to be on its way to the 200day (darker green line on the charts).

All the while, surging bond yields continue to send bond prices significantly lower.

Significant Economic Data from the prior week:

The Week Ahead

This week brings OpEx (Options Expiration) week, which typically means higher volatility than most other weeks. Since it is a high volatility week in the midst of a high volatility phase in the cycle, probably best to expect a lot of volatility this week. The result of which will more than likely mean wide ranging price activity in stocks and indices.

Helping the cause of increased volatility will be the PPI and CPI inflation reports. If inflation is hotter than expected, expect to see bond yields rise further along with volatility while sending stock indices lower. Whereas cooler than expected readings could put in a low for this current short-term downtrend in stocks.

Either way, not a bad week to wait and see how it all plays out.

Economic Data to watch:

Earnings This Week

Earnings season for Q4 2024 begins this week, with banks leading the way beginning on Wednesday.

At this point in time, corporate margins and sales growth are key overall. Should margins and or sales begin to fall here, it’s a recipe for a large wave of jobs cuts. Sending the unemployment rate to over 5%, which could lead to the beginning of a recession.

While I do not think that happens here now, it’s definitely something to keep an eye on as it would more than likely bring some carnage to markets should it happen.

Not worried yet, but definitely paying close attention.

WTF of the Week

For the first time in WTF of the Week history, we have a repeat winner. This is just too damn funny and sad not to share again. It’s an update to last months parity in inflation expectations from Republicans, Democrats, and Independents. Few things show how much your chosen media preference determines your worldview better than this chart currently.

One of the few things which made me laugh harder than seeing last month’s chart is seeing how it widened this month.

If you are not getting your news from multiple sources with differing agendas, you’re doing yourself a huge disservice.

Quote of the Week

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