November 15, 2024 – Financial Sense Newshour speaks with Tom McClellan about the post-election stock market rally, comparing it to similar rallies in 1964 and 1980. McClellan explains that these rallies often reflect initial optimism after elections, but reality tends to set in later, leading to a market pullback. He predicts the current rally will fizzle out soon (as happened this week), similar to those past events, as people realize not all problems will be immediately solved.
McClellan also examines seasonal trends, including the possibility of a Santa Claus rally, but suggests that political and economic uncertainties in 2025 may temper any market gains. He highlights the impact of rising interest rates, forecasting a short-term relief rally in bonds, but expects long-term yields to trend higher.
On oil prices, McClellan notes that while Trump’s pro-drilling stance could lower prices, geopolitical factors, such as potential sanctions on Iran, could lead to price spikes. He also mentions that gold and silver have seen price declines since the election, with gold likely continuing its downtrend in the near term.
Finally, McClellan discusses sector rotations in the market, with growth sectors like consumer discretionary and financials rising, while healthcare and utilities lag. He warns of liquidity issues in the market, which could create challenges through 2025 but expects a recovery to begin in 2026. Overall, McClellan advises caution, suggesting that 2025 will be a volatile year for the market.
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Transcript
Jim Puplava:
Well, since last week's election, the stock market has been on a tear, with stock prices lifting off in ways we haven't seen in other post-election periods. What does this mean? Let’s find out. Joining us on the program from McClellan Oscillator is Tom McClellan. Tom, you've got a number of charts that we’re going to share with our listeners. The first compares the S&P in the current period to the S&P between 1961 and 1964. What are the similarities, and what is this telling you?
Tom McClellan:
The main similarity is that there was a post-election celebration rally in 1964, just as we have now. In 1964, the margin of victory for then-President Johnson was even more lopsided, and Wall Street celebrated, thinking, "Hooray, we got what we wanted." Everything that led to the rally of 1963 was presumed to continue, and prices kept rising all the way to November 20, 1964.
In contrast, another chart I sent you looks at 1980 when Reagan beat Carter. There was also a post-election rally at that time because everyone thought, "Oh good, we’re going to get what we want, and things will change for the better." Interestingly, in both 1964 and 1980, the post-election rally ended on November 20. This time, I think the current rally is petering out a bit earlier. But it’s fascinating that, despite very different election outcomes, the rallies in both cases ended on November 20th.
Jim Puplava:
So, given that, and considering we’ve seen a big run-up—1,500 points on the Dow the day after the election—how much higher do you think this will go based on this chart?
Tom McClellan:
Probably not much higher. Typically, you get a post-election rally when everyone celebrates, thinking they got what they wanted. But then reality sets in. On election night, when the votes are counted, people think, "Yay, we got what we wanted, and everything will be great." It’s like the internet bubble in 1999 when people imagined that internet companies' earnings would grow exponentially forever. Then, when the bubble burst in March 2000, everyone said, "Oh, is that all?"
The same thing happens with post-election rallies. People imagine all their problems will be solved, great people will be appointed, and everything will be wonderful. But then they realize, "Oh wait, that guy was appointed? Oh, we still have problems at the border, the Fed isn’t cutting rates as much as we want, and we still have debt." Reality sets in, and you get a bit of a hangover.
That’s what happened in both 1964 and 1980. There was a selloff into December. What happened afterward, though, was different. In 1965, the uptrend resumed because there was no disruption to the status quo. But in 1981, there was a long, protracted, ugly period of a choppy, sideways, and down market that lasted until mid-1982. Reagan was a transformative president, and transformation can be painful. Even if transformation is good and needed, the process is difficult, and it’s not bullish for the stock market. I believe we’re in a more transformative period now, as opposed to a "keep the status quo" period like in 1964.
Jim Puplava:
So, given that this is an election year, and we’ve just talked about those two charts, what about the seasonalities that usually come around this time of year? The Santa Claus rally?
Tom McClellan:
That’s a great question. Let’s set aside the Santa Claus rally for a moment and talk about seasonality. Everyone knows that November through April is a bullish seasonal period. It works a bit differently in election years, but generally, that’s true. However, election years can be more variable depending on the outcome.
For example, in 1948, when Dewey did not beat Truman as expected, there was an immediate 10% selloff in November. The stock market ended up declining by a total of 19% before bottoming in May of the following year. So, seasonality doesn’t always work; it’s a tendency, not a guarantee.
The Santa Claus rally, created by Yale Hirsch in the '70s, refers to the last five trading days of the year plus the first two trading days of the new year. Generally, that period is up. If it’s not, it’s considered a bad omen for the coming year. It’s too early to discuss that indicator, but generally, yes, November, December, and the first few months of the year are bullish. However, I don’t think we’ll get that this time because of all the transformation, angst, and infighting that’s about to occur with Senate confirmations, disruptions in the Treasury Department, and pressure on the Fed.
At the same time, my long-term indicators, which ignore politics, suggest a period of illiquidity is coming. So, we’re going to see a collision of illiquidity and political uncertainty, which I believe will make 2025 a great year for market timers, but not for buy-and-hold investors.
Jim Puplava:
Speaking of problems, let’s talk about interest rates. We’ve seen 10-year Treasury yields rise by almost a full percentage point, from 3.6% to 4.5%, and the 30-year note is at 4.6%. If this trend continues and yields go above 5%, this could be trouble for the market.
Tom McClellan:
That’s true, and I expect that trend to continue in the long term. However, I think it’s a bit overextended right now. We should see a relief rally in bond prices, meaning a slight decline in bond yields, since prices and yields move in opposite directions. This is a good time to own bonds. If you buy now, you can collect a nice high interest rate for a while, and I expect a short-term rally in bond prices.
I’m not expecting a major new uptrend like in the '80s and '90s. In fact, I expect long-term yields to keep trending higher until around 2040, based on the 60-year cycle. But for now, in November 2024, I anticipate a countertrend rally in bond prices, meaning a drop in yields.
Jim Puplava:
Alright, let’s talk about another chart you sent, the near-month crude oil chart. What is that telling you? Where are oil prices headed?
Tom McClellan:
Everyone’s wondering about that. Trump has publicly stated he’s the "drill baby drill" president, which should mean lower oil prices if he successfully increases U.S. drilling. However, commercial traders in oil futures don’t seem to be betting on that right now.
The data I shared comes from the weekly Commitment of Traders Report published by the CFTC. It shows the positions held by different traders, especially commercial traders, who use crude oil in their business. These traders are usually oil producers who use the futures market to lock in the prices they’ll receive for future production. They’re almost always net short, but to varying degrees.
Currently, they’re net short to a very low degree, meaning they’re not eager to lock in these prices. They’d rather let prices float, anticipating they’ll be higher in the future. Historically, this signals a price bottom. Crude oil prices have been bottoming around $66 per barrel since the end of 2021, and I expect that support to hold.
If Trump increases U.S. drilling, that could affect supply, but foreign supply and demand also matter. If Trump cracks down on Iran’s oil sales, for example, that could remove supply from the market and boost prices. I’m not saying that will happen, but it’s a possibility that could explain why commercial traders think prices will rise.
Jim Puplava:
Let’s move on to another commodity: gold. It’s been on a tear since the beginning of the year, along with silver, but both have pulled back sharply since the election. What’s your take?
Tom McClellan:
Yes, it’s fascinating. Gold peaked on October 30th, hovering around $2,750 on the December contract. Then, on election night, it started dropping. It dropped enough to break through a long-term uptrend line, which caused a wave of sell orders. Since then, we’ve had a significant selloff.
Gold is now oversold on a short-term basis. Prices have closed down for nine of the last 11 trading days. When you see that much concentrated selling, it uses up a lot of energy, and eventually, the selling slows down. So, gold is due for a short-term bounce.
However, commercial traders have been net short in gold futures for a long time, and I think they’ll be proven right. Gold has more room to decline. The market was disrupted in 2024 by significant central bank buying, some of which was reported, some of which was not. Now that the election is settled, that uncertainty has faded, and I think overpriced gold will correct further. I wouldn’t want to own gold right now, except maybe for a short-term trade during the bounce, but not for the start of a new uptrend.
Jim Puplava:
Let’s talk about the S&P itself. Looking at the top 10 sectors, it seems like there’s been a rotation toward a more growth-oriented economy. Consumer discretionary is rising, while consumer staples, healthcare, and utilities are falling. Financials and energy are also starting to pick up. What’s your take on this sector rotation?
Tom McClellan:
Healthcare has fallen even more since the announcement that Robert Kennedy Jr. will be appointed as HHS Secretary, which has big pharma stocks selling off. He’s part of the disruptor class that people voted for, and we’ll see if they’re happy with what they got. His disruption could benefit smaller biotech firms that have struggled to get new drugs approved by the FDA.
In general, growth companies are expected to do better if the barriers to their growth are removed. That’s what people are betting on since the election—that Trump will come in, cut taxes, remove restrictions, and make business easier. That benefits growth companies.
However, growth companies are also more dependent on liquidity in the stock market, and there are signs of liquidity problems. We’re seeing a divergence between the NYSE advance-decline line and prices, indicating liquidity issues. High-yield bonds are starting to suffer, and smaller-cap stocks are also struggling. Liquidity problems tend to hit the smaller and more vulnerable sectors first, then move up to the larger stocks.
At McClellan Financial Publications, we spend a lot of time looking at breadth statistics to gauge liquidity. Right now, the message isn’t good. I think liquidity problems will persist through 2025. My expectation is that by January 2026, these issues will be resolved, and we can begin a new uptrend that could last until 2028 and beyond. But first, we have to get through the "winter" of 2025.
Jim Puplava:
So, from your perspective, looking at the charts and considering we’re in a typically favorable period of the year, you think this rally may continue, but not by much?
Tom McClellan:
Yes, I believe the immediate post-election rally is just about done. We might see a dip into December, followed by a year-end rally. However, what happens after that is uncertain. Will we follow the 1980 scenario, where things got ugly in 1981, or the 1964 scenario, where things remained positive for a year? That’s what needs to be resolved.
For now, I think the post-election rally has fizzled out. In fact, in our managed accounts, I’ve taken everything to cash after riding the rally. We went long the day before the election, anticipating the rally, but now I expect some choppiness. The market's expectations of perfection were overdone, creating a vacuum that the market will need to fill. I expect that to happen by the second week of December, followed by a year-end rally. But once the inauguration hits, reality will set in, and it won’t be as great as people expect.
Jim Puplava:
I couldn't agree more, Tom. As we close, if our listeners would like to find out more about the work that you do, tell them how they can do so, please.
Tom McClellan:
Well, if you just Google Tom McClellan, you'll find us. Our website is mcoscillator.com. That's a contraction of the McClellan Oscillator, the indicator my parents developed back in 1969. My father turned 90 this year. He still works with me every day and is doing great. My mom passed away in 2003, but my dad and I are still working together, and it's a great privilege to work with him. You can see information on our website about our twice-monthly newsletter and our daily edition. You can even sign up for our free weekly "Chart in Focus" email series. It's a free article every week delivered to your email—no strings attached, no spam. We won't sell our list, and your email address won't be shared with anyone. It's just a great way for more people to get acquainted with the work we do.
Jim Puplava:
All right, well, Tom, thanks so much for joining us on the program. If I don't talk to you before the end of the year, happy holidays to you, sir.
Tom McClellan:
It's my pleasure, Jim.
