2024 into 2025

The end of this quarter century certainly was eventful. Though we had a great year in the markets with companies reporting positive revenue and earnings growth, the political climate and uncertainty was a constant source of volatility. 

Q3 was one of the best I’ve seen, but sadly because of the uncertainty of the US elections, guidance was wide, with most management teams opting to be conservative after a solid year of performance. 

There were notable areas of weakness, such as in the housing stocks. With rates moving downward slowly and - more importantly - the long end of the curve barely budging versus the beginning of the year, homebuilders never got the break they have long awaited. As such, the materials sector has been waiting patiently in the background. Many of the companies - able to see what might happen in a world of greater global uncertainty found ways to get pricing off of lower production.

And this is a big deal. One of the major ways I’ve been contrarian has been with the idea of reverse economy of scale. To avoid cutting capacity in the long term, many companies simply did smaller batch production at higher prices. My thesis is that in many industries an increase in demand would not necessarily lead to an increase in prices in the future. This is particular the case in some of the industrials where there has been limited cuts to production capacity without decreased investment into AI for the purpose of reducing costs. With PMI - Manufacturing below 50 and services above 50, we will all find out the precise impact of all those consultants on business transformation when GDP ramps up.

Still, there are so many unknowns as we enter the first quarter of the next quarter century. And we enter it with a trigger happy market where the incremental dollar moves quickly to cash where it still yields 4%, well over historic norms. It’s for this reason that I am cautiously optimistic.

I want to own the homebuilders, but alas without greater understanding on the pace of rates and the fiscal budget, I’m likely at least a quarter early. I want to be long some of the manufacturing companies, because they are ultimately net winners if we stop the wars. But the timing of an improved situation on geopolitics is hard to say. And I want to be excited about tech. But how can you be, given that so many S&P components were waiting to see what happene with the election to offer more insight on 2025 guidance. 

Hence, I’m left with a desire to wait and see and that means holding slightly more cash and moving all my options back to at least after Q1. If I was forced to bet, I might choose the IWM to over perform the SPY and QQQ. But the challenge there is I need to see what happens in Q1 post election. Does M&A pick back up as promised and start to trickle down to small cap? Technically if you paused some of your strategy to see what happens, then small cap names become an interesting way to buy vs build your way into the future you’re hoping to direct.

And for sure I have call spreads all over the IWM at different maturities and strikes. 

But cash for me right now is king until after this next earnings season. JPM will report Jan 15th. Then you have the inauguration followed by the lower trading and business days of Lunar New Year. Hence, it really is prudent to stay slightly more in cash through mid-February.