Animal spirits in January

Off to Philadelphia this week, rekindling great memories from my college years at U of Penn’s Wharton School—where Trump also attended, and here the comparisons end. Much like my MBA at Pittsburgh’s Carnegie Mellon U, Tepper’s alma mater and again where the comparisons end. The big news in Philly this week has been the Eagles’ attempt to sell the snow that fell during Sunday’s game versus LA last weekend. Shipping it in dry ice, and recommending you freeze it right away, they sold out! I presented my AI Revolution to a large group of advisors at the Loews Hotel, a national historic landmark and home to our country’s first savings bank. After listening to my speech, the tech help told me they discussed what they’d do after AI takes their jobs. (It is a “Can you handle the truth?” type of presentation.) A new week and a new administration, and the S&P is up about 2%, looking like the best start to a new term since Ronald Reagan’s second term in 1985. President Trump’s speech was held in the Capitol due to the bone-chilling temperatures besetting much of the US this week. The small crowd of attendees made the number of tech executives all the more striking. Day 1 of the Trump 2.0 era featured a blizzard of executive orders, as advertised. One item missing from Trump’s orders: tariffs. It was always likely that imposition of tariffs would have to wait—on the assumption that the terms of tariffs are negotiable. He did make motions towards tariffs, though, directing officials to investigate the causes of the trade deficit in goods and to examine whether normal trade status with China should be revoked. But 25% tariffs on Mexico and Canada (?) were threatened for February 1! In Trump’s first term, US stocks fell a combined 5% on days when the US announced tariffs and 7% on days when other countries retaliated.

As January goes, so goes the year, they say. And indeed, since World War II the S&P 500 has risen an average 12.2% in years when January is positive, versus a mere 1.4% when it is not. With the index up roughly 3.5% as of now, so far so good! Meanwhile, investors are struggling to handicap Trump 2.0. Mid-January saw AAII bull/bear sentiment in freefall, plunging to 25.4% bullish on January 15, the lowest since November 2023 and the sort of drop that typically signals capitulation. However, the reading for January 22 rebounded to 43.4%, above the 37.5% long-term average. Both bond pessimism and dollar optimism are at extremes, and the dollar has become highly correlated with US growth stocks. The dollar’s rise since last autumn has been attributed to increases in long-term rates and expectations that a Trump win would slow the Fed’s hand. So far, with much of what Trump has done well-known already, and with tariffs remaining indeterminate, the market has been more interested in earnings and the Fed. The next few months will be important for inflation readings. They could be encouraging, given moderating rents (more below) and potentially favorable y/y comparables. Still, on a non-seasonally adjusted basis, historically a majority of the increase in core CPI takes place in the first quarter. American exceptionalism remains intact, with many major developed and emerging market indices down since Trump won. Anecdotally, the MSCI US index outperformed the MSCI EAFE in each year of Trump’s first term. Breadth remains a concern, unfortunately, with the equal-weighted S&P 500 and the Russell 2000 lagging.

It’s a strong reporting season so far, with earnings likely to rise about 12% y/y factoring in beats, and these solid earnings are being rewarded in share prices. Earnings beats are just a bit above the long-term average of 78%, an impressive sign of strength in the broad market. Both price and earnings momentum strategies are succeeding simultaneously in more sectors than any time since 1977 when data first became available. Banks reported strong earnings, which is noteworthy since they don’t yet reflect benefits from the Trump administration’s deregulatory moves. Soon we’ll turn to the Magnificent Seven. The lion’s share of the economy’s rewards in recent years has gone to the largest companies and the most well-heeled consumers. Now that small business confidence is surging, the “two economies” narrative of recent years may be coming to an end. Smaller caps are seeing increasing analyst estimates and company guidance is looking up. If that continues, breadth should improve. Bullish! Profit growth as measured by the National Income and Product Accounts (NIPA) was up 6% y/y through the third quarter. That metric has always gone negative within a few quarters before a recession begins. No recession on the horizon, thus giving productivity-enhancing investments time to work. And just as animal spirits have arrived on the scene!

Positives

• Good news on inflation Residential rents are cooling off. CoreLogic’s single-family rent index rose just 1.5%, the lowest in 14 years. Rent prices paid by new tenants fell 2.4% last year. Taking into account both continuing and new tenants, all residential rents rose just 3.2% last quarter, a low for the cycle. The all rents metric leads CPI shelter inflation.
• America’s exceptional growth The IMF forecasts the global economy growing at a 3.3% rate this year and next, versus a pre-Covid trend of 3.7%. The IMF raised its outlook for US growth and noted that acceleration is more likely than deceleration. For other major economies, however, the growth outlook weakened.
• Animal spirits in real estate? Existing home sales rose 2.2% m/m in December and 9.3% y/y to an annual rate of 4.24 million, the best since last February. Rates for 30-year mortgages, which had risen to their highest level since the spring, fell nearly 20 basis points this week to a still-high 6.9%. 

Negatives

• The consumer has a slight cold The University of Michigan’s consumer sentiment index was revised lower for January to 71.1, down from an earlier estimate of 73.2. One-year inflation expectations remained at 3.3%, while five-year expectations dropped from 3.3% to 3.2%. Both figures were up sharply from December expectations. 
• Mixed signals The S&P Global US services PMI fell to 52.5 versus expectations of 56.5. The manufacturing PMI for its part advanced to 50.1, beating expectations for 49.9. US exports declined, with outbound containers from the Port of Los Angeles off 9.1% y/y.
• Weak growth across the pond Europe remained mired in sluggish growth, with the German economy now having contracted, albeit modestly, in both 2023 and 2024. Still, there were glimpses of growth, with the Eurozone Composite PMI up 0.6 to 50.2 versus 49.7 expected. Manufacturing remained below the 50 level, indicating further contraction, while services came in at 51.4, showing growth. Consumer confidence in the euro area rose slightly but remained weak at -14.2%, as respondents expressed concern about employment, the economy and financial conditions.

What Else

The Year of the Snake starts January 29 We tend to think January sets the tone for the year. That’s because, for us, the new year starts on January 1. In East Asia, though, it’s the lunar new year that signals a fresh start. That comes in late January or February each year. So, the weak January that Asian markets have suffered may not have the same significance it would here.

Still a huge country China’s population shrank below 1.4 billion in 2024, the third straight year of declines. The UN projects that China’s population will decline by 150 million in 2050. India, where the median age is 28, surpassed China’s population in 2022. The median age in China is now 39; in 1970 it was 18.

The throne room Rumor has it that on January 20, 2017, when Donald Trump arrived in the Oval Office for the first time as president, he had strong views on one aspect of the furnishings. Seeing the washroom, he said, “I hate that décor; change that bathroom” and had it redone as part of a $1.75 million renovation of the White House.