December 13, 2024 – Macro Tides' Jim Welsh joins Financial Sense Newshour to discuss market trends, economic policies, and the outlook for 2025. Welsh explains that the market's high expectations for rapid policy implementation under President Trump might be unrealistic, citing challenges with reducing deficits, trade negotiations, and government spending cuts. He's predicting a potential 5-10% market correction in early 2025 as high expectations will likely be met with political realities. Listen in to hear how things are likely to play out over the weeks and months ahead!
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Transcript
Jim Puplava:
Well, stocks are having a bit of a difficult week, a little bit of reservations about what might lie ahead in the future. But the Nasdaq continues to plow forward. What does all this mean? Joining us on the program from Macro Tides is Jim Welsh. And Jim, we're going to be posting an updated piece that you just put out. We're going to have that on our website for our listeners. But also, you're going to have a piece on the December Macro Tides. Talk about that for a minute before we begin.
Jim Welsh:
Yeah, thanks, Jim. I want to wish you and all your listeners a Merry Christmas and, obviously, a healthy and happy New Year. Yeah, the December Macro Tides, Jim, I covered a lot of ground, some of it looking at tariffs, the impact of tariffs, which obviously is going to be a cornerstone of President Trump's first six months or so in office. In addition, what has historically happened to the dollar—reviewing going back to the mid-1980s—what has been the key determinant of the dollar's trend, as well as just looking at the overall economy. So if someone would like to receive the December Macro Tides, just send me an email: Jim Welsh Macro at Gmail. That email is also going to be on the piece that you are posting after our talk today.
Jim Puplava:
Well, listen, let's take a look at the market. You know, there's been a lot of euphoria since the election of President Trump. There are great expectations for what's going to happen in the market next year, but how much? I mean, we've got two things—he wants to stimulate the economy, then we have tariffs, but also they've got DOGE coming in that basically wants to shrink government. And I think, Jim, we need to bring up the fact of how much government has played in keeping this economy alive over the last three or four years when we're running 6 to 7% deficits—I mean, multi-trillion-dollar deficits. So let's begin with that.
Jim Welsh:
Yeah, well, that's, I think, one of the hallmarks. BlackRock, which is the big money manager—I think they have $11 trillion in assets under management. So "big" doesn’t even do them justice. But they came out with a piece, Jim, that basically said the boom and bust cycles of the past are gone. And they cited four or five megatrends that they believe will eliminate any semblance of the business cycle in coming years. I think that is hogwash because they cited inflation coming down. Well, inflation came down because there was inflation due to supply chain disruptions. As those eased, it reduced price pressures. The cost of oil and crude oil has dropped over 30%. That has had a huge impact on bringing inflation down. We're on the threshold of shelter inflation coming down.
So my point, Jim, is that the tariff aspect of what Trump is proposing and other parts of his agenda are somewhat disruptive. One of his Treasury Secretaries has said that he wants to bring the deficit down from this last year, which was 6.4%, to 3%. So, to your point, the government has been running an almost $2 trillion deficit for the last couple of years. This is unprecedented during peacetime. The only time it’s ever happened where the deficit was bigger was obviously during COVID, the pandemic, and World War II.
So bringing the deficit down from over 6% to 3% is not going to happen overnight. But obviously, as you shave government spending, that's less stimulus going into the economy, and the economy is going to slow. Now, they’re hoping that some of the other policies will increase growth, but I just think the timing aspects may be off. It’ll take time, I think, to generate some of the growth that they would like to see.
So I think the main point here is expectations have been raised in terms of how quickly President Trump is going to be able to get his agenda through Congress, as well as the trade negotiations. And I think people are just too optimistic, Jim. In the House, the Republicans have a plurality of, I think, three seats because three other members have been nominated for Cabinet positions. And if those people are accepted, it’ll be months before a replacement election is held.
So I think people are expecting a lot to happen very quickly, and I just think, realistically, Jim, it’s going to take more time. The trade stuff, I think, is going to get sticky from time to time. And therefore, I think the market is set up as we go into early next year for some disappointment. And as a net result, I think in the first quarter, a correction of 5 to 10% is probably very likely, and we’ll see what happens after that. But that is my expectation of the setup going into 2025.
Jim Puplava:
Yeah. And if you take a look at these earnings expectations, I mean, stocks are selling at very, very high multiples. So in order to keep those multiples up there, interest rates have to remain low. And, number two, companies have to keep increasing their earnings to justify these valuations. So there are a couple of issues there that the market may have to deal with in the new year.
You mentioned something that really surprised me in the sense that Trump swept both houses of Congress. He had the majority in the House. And holding the majority in the House is going to be key, and holding the Senate, if he wants to get the extension of his tax cuts. But what surprised me, Jim, is many of the people that he appointed to Cabinet posts are coming out of the House. So, you know, as you talk about, he’s down to only, what, a thin majority?
Jim Welsh:
Yeah.
Jim Puplava:
Now three.
Jim Welsh:
Yeah, yeah. And again, if you imagine what that means, I mean, the Democrats are going to fight just about everything he wants to do. But within the Republican ranks, there are more conservative members, and those people have as much leverage as any Democrat would in terms of negotiating aspects of any piece of legislation.
And I think that some legislation is going to run into that negotiating phase from some Republicans. And the bottom line is, again, I think the quickness that people are expecting legislation to go through Congress is going to wind up being a little slower than what expectations are right now.
And the other point I would make, Jim, is President Trump won the popular vote for the first time a Republican has won since 2004. And as we all know, what happened is large groups of Hispanic voters and Black voters switched from being traditionally Democratic voters to voting for President Trump. And there were, you know, a couple of reasons:
A) The economy, from their perspective, was better under his first administration.
B) Inflation was obviously lower.
That has been a huge problem for lower-income people, and I think they’re voting in anticipation that President Trump is going to be able to get prices down. And I think that’s going to be challenging, Jim, because as we know, many prices went up 20%, 30%, even 40% over the last four or five years. So the rate of change has gone from 9% to, let’s say, two and a half to 3%. So, you know, on an annual basis, yeah, it’s come down. But in an absolute sense, prices are still up 30% to 40% on a lot of things that people buy.
So I think there’s a risk that it’ll be very difficult for President Trump to actually get some prices to fall absent a recession. And so I think there’s the risk as we go out two years from now at the midterm elections, especially related to the very thin margin in the House, that if people don’t see some relief in terms of the cost of living, that some of those folks may revert back. Like, they’ll be frustrated and disappointed: “Well, Trump didn’t do what he said he was going to do. I don’t see where, you know, the cost of living—what I’m paying—has gone down.” And so they’ll switch back.
I think that’s a real risk. But obviously, we don’t have to think about that until two years from now. But again, to me, I try to look forward to see what potential problems are. There’s a lot of excitement and enthusiasm right now in terms of those who voted for Trump and their expectations. And I just think that those expectations are high relative to how quickly changes can be enacted.
Jim Puplava:
I want you to comment on the various sectors in the markets. We’ve got the Dow pulling back, but you’ve got the Nasdaq at nosebleed levels. Same with the S&P. It seems like the rotation is back into technology again. I don’t know if that’s a sense of a slowdown, that tech stocks will be immune to that—which I don’t think—but regardless of that, if you take a look at where the markets are, they’re very elevated. And the only way they can stay elevated, in my opinion, Jim, is if interest rates come down, which can raise multiples, or corporate earnings accelerate. Because there’s no other way you’re going to see stocks go up unless at least a couple of those things happen.
Jim Welsh:
Yeah. And again, it’s going to be challenging, I think, to meet those expectations. And you’re right—earnings expectations right now are, I think, what, 11% to 15%? That’s a high bar given where we’re at and what I think is likely to happen.
The other thing I would point out, Jim, is earnings are really critical, but so much of the market runs on psychology and emotion. And because the market has been doing well over the last two, three years, households have increased their exposure to the stock market as it’s been going up. And right now, household exposure is the highest ever.
So if we go back throughout time, whenever there was a peak in household exposure to the market, those were right before significant pullbacks—like in 2000, 2001. In the subsequent 10 years, there were two declines of 49%, and one was 57%. Go back to the mid-1960s—the market entered a 16-year sideways period with numerous declines of 30%. So when everybody’s kind of already in, it’s very difficult to, to your point, get prices to go even higher.
And if earnings come in a little less than expected, or the economy slows more than expected, historically, then the tide starts to flow out. And I think that is one of the risks also in the market at this point in time. To your point, expectations for earnings are so high, and everybody’s already in because of those expectations. It’s going to be very difficult to materially push the market much higher without, I think, a reasonably sized pullback over the next one to two years.
Jim Puplava:
Another thing that kind of strikes me, Jim, is, you know, everybody’s excited about AI, but most people don’t realize the pressure that’s going to be put on the grid from AI, the cloud, EVs, reshoring, and an energy transition. I mean, you and I live in California, where we’ve just been given alerts—yes, with the fires—that we could lose power here. And we’re starting to see these power outages across the country.
So you can get excited about AI, but those data centers require an enormous amount of electricity, and they’re not going to run on wind and solar. So Elon Musk just built a data center, and he had to bring in two natural gas plants, which he did within three months. But I also wonder about what’s going to happen to the grid with all these forces collectively hitting the grid at almost the same time.
Jim Welsh:
That’s a great point that you’re bringing up, Jim. People don’t realize just how much energy is needed to do all these calculations. So President Trump has said he’s going to push as hard as he can to get energy prices down. But as we know, in recent years, the major oil companies have cut back on exploration and instead used their cash flow to either buy back stock or pay out dividends.
So President Trump is going to be running up against the philosophy that energy executives have adopted, which is again atypical from what they have done in previous decades. But I think that again suggests it’s going to take some convincing to say, “Hey, I want you to lower energy prices.” Well, it’s kind of like shooting yourself in the foot.
So I think that’s going to be a challenge. The physical demands that you’re talking about in terms of the grid, its reliability, and the demands—those are real things. And we’ve already seen evidence where grids suffer and break down, especially down in Texas. They’ve had a number of very big problems.
The other thing I’m going to point out, Jim, is on the other side, companies have thrown an enormous amount of money at artificial intelligence. And I’m not doubting, if you will, the potential promise of artificial intelligence over the next five to 10 years. But companies have thrown between $50 and $70 billion over the last 18 months on spending on AI. And so far, what they’re getting in terms of return on that investment has been pretty meager.
If we see the economy slow down and that trend continues—where, “Gee, we’re throwing a lot of money at this. Where am I seeing either a big increase in revenue or cuts in costs?”—the net result is, in all likelihood, I think we’re going to see companies pare back the feverish spending that we’ve seen in the last 18 months.
All it’s going to take is a small retracement of spending to kind of pop the bubble that is surrounding AI and stocks like Nvidia. And technically, what I would tell you, Jim, is if Nvidia closes below $130 to $132, the chart would imply a drop to $110 and maybe down to $100. So, you know, the chart pattern is suggesting there’s a degree of vulnerability.
And I think the points that you’re making, as well as the issue of spending without seeing a return on investment, are going to make it difficult for all the goals that President Trump has in achieving them very quickly—because that’s what people are expecting. So, you know, getting energy supplies up enough, nuclear reactors—even the new models that they’re talking about—we’re talking five to seven years, even if they are able to expedite the whole process.
So those are the mismatches that I think investors right now maybe aren’t fully aware of.
Jim Puplava:
Yeah, it kind of reminds me of—Jim, you remember in the heyday of the Internet bubble, anybody that came out and was doing anything with the Internet would go public. The stocks would double or triple the day they went public. And it’s kind of reminding me of what I’m seeing in AI. There’s a lot of potential in it, but in the end, how many companies will actually make money from it?
Jim Welsh:
No, you’re 100% right. That issue will really come to the forefront when we start to see Nvidia say, “You know, our sales, instead of being up hugely, are only going to be up a decent amount.” And that will signal that, wait a second, we’re entering and starting to approach what you’re talking about—that shakeout period where you’re going to have to prove it.
And what we saw with the Internet bubble—stocks like Amazon and many other very, very successful companies got crushed during that window of time. And they don’t have to get crushed, but at the same time, can they drop by 50%? I think that’s a very, very high likelihood, Jim.
Jim Puplava:
What about—let’s talk about the dollar. Both J.D. Vance and President Trump have talked about a lower dollar. If that happens, number one, it could be inflationary because we would pay more for the goods we import into this country. But what would that mean also, in your opinion, for, let’s say, gold and silver—the precious metals markets?
Jim Welsh:
Yeah, I’m glad you brought this up. And as I mentioned earlier, in terms of the December Macro Tides, I went into a deep dive going back over time in terms of what really has consistently moved the dollar. Obviously, interest rate differentials—in other words, what’s happening with interest rates in the U.S. versus Europe and other countries—has been a factor. Trade has also been important, as has the overall level of economic activity. If the U.S. is doing better than other countries, that supports the dollar.
All those things have played a role, but an administration’s philosophy toward the dollar has been, in my view, the most consistent driver of the direction of the dollar. And what Trump said back in 2016—and I don’t think he’s changed his view—is that the theory of a strong dollar sounds good, but in reality, not so much.
And again, to your point, if the dollar declines, it’ll make it easier for us to export more goods because demand for U.S. goods relative to a decline in the dollar will increase. And President Trump is all about trying to bring businesses that have been overseas back to the U.S.: “Hey, you bring stuff back here, and instead of paying 21%, you’ll pay 15%. Make America great again.”
So I think that at some point next year, President Trump will again make those views known. And currency traders really don’t care—they’re kind of agnostic. If you tell them you want the dollar to go up, great, they’ll make money buying it. If you tell them you wouldn’t mind the dollar going down, great, they’ll short it or buy other currencies. So I think that’s what’s coming, Jim.
And the other interesting thing, as you know, I like to combine technical analysis with the fundamental side. So that’s the fundamental side. Technically, the dollar dropped from about 115 to 100 after topping in October of 2022. Since that low near 100 in the fall of 2023, what we’ve seen is a chart pattern where the dollar rallied to 107, pulled back to 100, and then got above 107 just in the last few weeks.
That pattern suggests that the rally from that low 18 months ago is ending. And what it implies is the dollar is on the cusp of another decline of 14 to 15 points. So if it gets up around 108, we’re talking a decline below 95.
So this is the synergy that I like to try to find—when you can develop a narrative or an outlook based on good fundamental analysis and then you look at the technical side of the equation, and you see this pattern suggests we’re on the cusp. After a little bit more dollar strength, I think between now and maybe Inauguration Day, the dollar is on the cusp of a fairly significant decline. And I think that’s what’s coming.
Gold would be one of those beneficiaries. In November, I turned negative on gold when it was above 2750. My anticipation and expectation is that gold will likely drop below 2500 over the next one to three months, and that will complete its correction. And then we’re going to see gold go to a new all-time high above the high it made in November at 2789.
So gold would definitely be a beneficiary of weakness in the dollar. And I think that’s what President Trump favors. And I think when that becomes more widely known—because right now, people are thinking, “Oh my God, you know, everything he’s talking about is going to boost the dollar, and that’s why the dollar has been rallying in recent weeks.” But I think that’s going to come to an end in the not-too-distant future.
Jim Puplava:
Well, let’s talk about within the S&P. I’d like to get your comments. I mean, consumer discretionary looks very strong. We’re in the holiday season; consumer spending is expected. Consumer staples—kind of weakness there. You take a look at energy—that’s been going down. Finance—that’s starting to dip. You take a look at healthcare—that’s dropped. Industrials—that’s heading down. Materials—that’s heading down. Technology is heading up. Utilities—heading down. Real estate—heading down. And maybe communications.
So there are very few sectors that are doing well now. And it seems like it’s like, okay, back to tech.
Jim Welsh:
Yeah, I think that’s exactly what you’re talking about. Plus, I think there are people and money managers that want to show, “Hey, look, I own those tech stocks going into year-end,” in the year-end statements that they’re going to show to investors.
So I think there’s been some of that going on, Jim, in terms of the positioning in quote-unquote "the winners." But to your point, what’s interesting is, in the last seven or eight trading days, the number of stocks up versus down has been negative six or seven out of the last eight trading days. It did it seven days in a row; then yesterday, there was a small positive.
Historically, this has only happened on a few occasions. And what subsequently happened over the next six to 12 months is the S&P was down. So again, the technical underpinnings are beginning to weaken, as you just noted, with that recipe of all the different sectors starting to lag and, you know, show weakness. It’s showing up in the underlying statistics as well.
So again, my take, Jim, is looking at all this, I think the market’s setting up for at least a correction of 5 to 10% in the first quarter for a lot of the things that we’ve already discussed. The technical aspect is there may be one more push, in my view, of the S&P above 6100, but I think that’s likely to be it. And then we’re going to be in correction mode, I think, going through the first quarter, going into the spring.
Jim Puplava:
Well, listen, Jim, as we close, why don’t you tell our listeners—you put out some really great stuff. I like the way you combine fundamentals with technicals. Tell our listeners how they could find out more.
Jim Welsh:
Go to MacroTides.com or, as I noted earlier, send me an email: Jim Welsh Macro at Gmail, and I’ll send you some recent reports. And thank you for your kind words. I appreciate that, Jim, and it’s always great to join you. It’s really a pleasure and a joy to have conversations with you. You always ask great questions, and I think your listeners receive value with all the different interviews that you do.
So thank you again. Merry Christmas and Happy New Year.
To speak with any of our advisors or wealth managers, feel free to Contact Us online or give us a call at (888) 486-3939.
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