Author: Smart Investing

Stock market

A Wealth of Common Sense: The Roaring 2020s

Posted on by Smart Investing

The decade is nearing its halfway point. And what a wild ride it’s been. First, 2020 kicked off with the pandemic, leading to one of the fastest selloffs in stock market history. Following that rally, stocks are up over 180%.

Of course, it wasn’t a straight line. 2022’s bear market resulted in stocks dropping 18% over the year, and nearly 25% from their peak. Typically, bear markets are spaced a bit further apart than two years.

Despite those big drops, stocks have now seen two years of over 20% gains. Typically, if earnings hold up, markets can continue higher, if at a slower pace. With the market up 70% since its 2022 low, a few years of flat performance would result in strong annualized returns of 14.5%.

Meanwhile, investors who stuck with a dollar cost average have seen returns closer to 17% annualized so far this decade.

In other words, even with the big drops, stocks have come back stronger than ever.

Given that overall performance, investors who stayed the course during market selloffs ended up coming out ahead. That’s a good thought to bear in mind in the next stock market selloff.

It’s likely that the second half of the 2020s won’t play out like the first half. Drawdowns are unlikely to be as bad as the pandemic selloff. And bouncebacks may not be as strong. But investors should continue to stay the course in fearful markets.

 

 

To read the full analysis, click here.

 

Economy

Rebel Capitalist: Mortgage Rates are Soaring! (Here’s What Everyone’s Missing)

Posted on by Smart Investing

One of the surprising trends of the past few months is the fact that interest rates have been trending higher. While the Federal Reserve has cut its short-term federal funds rate, long-dated rates haven’t fallen. Instead, they’ve jumped higher.

That’s created an unusual market. The most impactful result of this change is that mortgage rates have soared. That’s because mortgages are held for 30-year periods.

Since September, rates have risen from an average of 6.2% to 6.9%.

Why does this matter? The Fed started cutting rates citing its need to protect the labor market. Unemployment ticked higher in 2024, and still ended the year at a healthy level.

But the rising trend doesn’t bode well for consumer spending if it continues.

So, the Fed’s shift to protecting the jobs market comes at the expense of potentially higher inflation. The bond market may be pushing yields higher to account for higher expected inflation.

With rates rising, the economy could potentially slow, leading to a stock market selloff. And the housing market could also struggle with rising mortgage rates.

Consumers may have trouble selling a home as well, given that buyers will have to contend with higher payments as interest rates rise.

Since inflation hasn’t quite picked up quite yet, investors can still benefit from these rising rates with a higher allocation to bonds.

 

For the full look at rising mortgage rates, click here.

Economy

Heresy Financial: The Fed’s Hidden Move Just Ended the Reverse Repo Facility

Posted on by Smart Investing

The Federal Reserve is best known for its decisions on short-term interest rates, known as the federal funds rate. However, the central bank has several tools at its disposal. These tools allow them to tweak inflation and the money supply.

The Fed’s goal is a mandate between keeping both inflation and unemployment low. Typically, these goals are at odds, and the Fed must perform a balancing act. One of the ways they can do that is with repo facilities.

The reverse repo facility keeps a floor under short-term interest rates. The Federal Reserve buys Treasuries from banks with these facilities. Banks can then buy new Treasuries, providing more government funding.

In short, these facilities are a way to move newly created cash into the financial system. But it does so at a cost of reduced assets overall.

Over the past few months, the Fed has been winding down its reverse repo facility. This means the bank has been buying up financial assets to reduce its repo balance.

The potential downside is that the government is now essentially short on cash. And that the U.S. government could face a crunch in just a few days, and even hit its debt ceiling.

This behind-the-scenes maneuver ends some of the Fed’s extraordinary measures from the pandemic era. But it could mean more market volatility with less liquidity in the system to start 2025.

 

To see a full explanation of the reverse repo facility and what this move means, click here.

 

Stock market

LPL Research: Keys to Stock Market Gains in 2025

Posted on by Smart Investing

The stock market had a banner year in 2024. The S&P 500 rose over 20%, and for the second consecutive year. Gold and silver also rose over 20%. Bitcoin soared over 100%.

Volatility was low, with a maximum pullback of just 8.5%. That’s well under the average of 13% for the average decline. There are several reasons to suggest that the market may be more volatile in 2025, but could still continue higher.

Historically, a bull market that lasts two years has a strong chance to rally for a third year. The statistics are fairly strong, with only a recession or overly aggressive Federal Reserve breaking such a trend.

Given that odds of a recession remain low, this trend looks strong. Plus, the Fed is still on track for further cuts, not rate hikes. So far, so good.

In the third-year of a bull market, stocks tend to have positive returns most of the time. However, those returns are about 5.2% on average, well below the year 1 and year 2 returns. That suggests that 2025 will see markets trend higher, but not in a big way like in 2022 or 2023.

Overall, those returns could also be driven by a mid-year correction that sees a big pullback in stocks. Markets historically have a 10% correction every 12-18 months. Given the drop of only 8.5% in 2024, markets could be in for a deeper pullback amid a generally bullish year.

 

To see the full data on the third year of a bull market, click here.

Economy

Figuring Out Money: A Perfect Storm Is Brewing for 2025

Posted on by Smart Investing

Several economic indicators have soured in recent months, hidden behind the stock market’s strong returns. Consumers are starting to struggle, as seen by rising credit card balances and delinquencies.  

That’s at odds with expectations for the stock market to trend higher in 2025. While the market can trend higher, consumer spending is the lion’s share of the economy. If that’s in trouble, markets will likely struggle in 2025.

Part of the reason for struggling consumers? High interest rates. Since 2020, interest rates on credit cards have moved from 15% to over 20%. And even with the Federal Reserve cutting interest rates, the trend for credit card rates is on the rise.

That makes it more challenging for consumers carrying a balance on their credit cards to make their minimum payments. Over time, overly high rates can cascade out of control.

With rates rising, consumers look to longer-term loans to afford monthly payment costs. That’s leading to longer holding times for products such as automobiles. And a longer hold time can also reduce future spending.

While markets have been trending higher over the past two years, the past year has seen a rise even as unemployment has ticked higher, from 3.4% in early 2023 to 4.2% at the end of 2024.

Unemployment is still well under its historical average, for now. But a further trend higher bodes poorly for consumer spending as more and more find themselves out of work.

 

To see the full issues consumers are contending with as we enter 2025, click here.

 

Economy

FT Alphaville: Never Ever Make Predictions

Posted on by Smart Investing

The end of one year and the start of another leads to many predictions. However, a look at investment predictions reveals that predictions don’t tend to have any accuracy to them.

It doesn’t matter if the predictor is an expert in their field or not. The major annual predictions from the big Wall Street banks are often wide of the market’s actual results. In fact, the average prediction tends to simply take an existing trend and extrapolate it.

That’s why many analysts see a good market return in 2025. It follows on the recent past from 2024 and 2023’s returns.

Over time, the average prediction runs in a much lower band than actual market returns. The experts aren’t good at predicting major market swings, both lower and higher. Failing to predict a market crisis is one thing.

If the experts can’t make good predictions, what indicators can investors use? One potential measure that may work is volatility. Hedge funds tend to also use volatility targeting as a way of better predicting extreme market moves.

While predictions often fail to pan out, it’s still important to plan for potential market scenarios ahead of time. That way, investors won’t get blindsided with a rapidly-changing market. And can even set themselves up to profit, especially during fearful times.

 

To read the full analysis on the trouble with predictions, click here.

Commodities

Kitco: Gold Trades Under Pressure as Investors Digest Fed Policy Modification

Posted on by Smart Investing

The Federal Reserve shifted its stance in December, leading to some slight market turmoil. The central bank will slow its pace of interest rate cuts in 2025, citing uncertainty. In the meantime, inflation data shows that inflation is still down overall, but remains “sticky.”

These two events should be good for gold. The metal tends to hold its purchasing power over time. And if inflation kicks higher, gold prices should move higher as well.

Instead of seeing support, however, gold prices have dropped. In the short-term, that may relate to moves in the U.S. dollar index, which tended higher.

Markets are more focused on the direction of interest rates, rather than absolute levels. A slowdown in interest rate cuts suggest that markets may be nearing a neutral level for rates soon.

If that’s the case, then other factors may be at play for gold in 2025, following its strong performance in 2024.

Changes in the economy, which could be impacted by tariffs, could see a slowdown that takes asset prices lower. Any response to that slowdown would likely be inflationary, and then push gold higher.

For now, gold remains in an overall uptrend, even if gold-related stocks have been more mixed. If signs get more bullish overall, gold stocks may be able to stage a strong rally in 2025.

 

To read the full analysis on gold’s latest moves, click here.

 

Cryptocurrencies

Swan Bitcoin: Why This Bitcoin Dip is a HUGE Buying Opportunity:

Posted on by Smart Investing

After peaking at over $108,000, bitcoin prices pulled back to the low $90 range. That’s a drop closing in on 15%. For bitcoin, that’s hardly a significant drop. But it’s probably enough of a drop as the asset class matures that investors should consider adding to their position.

The days of bitcoin dropping by 40% or 50% overnight are likely over. There are far more buyers interested in the asset today than in the early 2010s.

Plus, it’s easier to safely buy bitcoin than ever before.

As with any asset, periodic pullbacks are a feature, not a flaw. Pullbacks cause leveraged traders to close out their positions. This resets the stage for a healthier trend higher over time.

For bitcoin specifically, the asset has had a strong year. Price-wise, bitcoin has nearly tripled off its low of the year. And it’s following a cycle trend that should cause the next peak in 2025.

Meanwhile, rising institutional adoption points to significant demand for 2025 and beyond. Bitcoin’s nature, offering a fixed total supply make it an optimal asset for wealth storage over time.

Overall, investors who use opportunities to buy assets on a pullback are rewarded when that asset rebounds to new highs. That should be the case of bitcoin for most of the next year.

 

To view the full review on bitcoin, click here.

Stock market strategies

A Wealth of Common Sense: Looking for the Next NVDA

Posted on by Smart Investing

Investors have enjoyed a strong stock market over the past two years. The market rally started right around the time of the launch of ChatGPT in late 2022. And investments in AI turned around the bear market and brought back optimism for investors.

No company has been a better sign of that trend than Nvidia (NVDA). The graphics processing unit (GPU) manufacturer has had a long life. It’s shifted from niche gaming, to demand for cryptocurrency mining, and now AI tools.

While Nvidia can likely continue trending higher, the big returns have been made. Investors would be wise to look for the next Nvidia. That’s especially true as Nvidia’s shares have started to slow down their returns in the second half of 2024.

What should investors look for? A company with a relatively small market cap for starters. That can lead to faster growth. It’s easier to go from $10 billion to $100 billion than for Nvidia to add another $1 trillion.

Smaller companies can be more volatile and unproven. But that was the case with Nvidia when it first started to get compared to Intel (INTC).

Intel has been a poor performer as it’s been unable to successfully pivot to AI-related chips.

Finally, investors should look for American-based companies. The U.S. has the most developed technology, legal, and financial networks. Plus, geopolitical considerations remain a concern, making the U.S. ideal for tech investors today.

 

To listen to the full podcast, click here.

Stock market

Elliott Wave Options: Should You Buy this Dip? … Elliott Wave 4 Confirmed!

Posted on by Smart Investing

Markets may have delivered a Santa Claus rally this week, but the prior week’s sharp selloff may have spooked investors. Investors were disappointed by the Federal Reserve, but then moved higher.

So what’s next for investors? Will fear come back after the holidays? Or was the recent selloff simply a function of investors shifting their expectations quickly? Looking at events now, it’s likely that markets are now ready to trend higher.

The pre-holiday selloff was likely driven by traders who were overleveraged. And as markets sold off on the news that the Fed would slow its pace of rate cuts, additional sale points were hit. The result? A cascading selloff.

Fortunately, reasonable inflation data and the quiet holiday trading season were able to stem the tide. And it’s likely that markets could continue higher into 2025.

After all, interest rates are still on track for some further declines in 2025, which remain bullish. And as long as inflation and unemployment data remain strong, markets can adapt to a slower pace of interest rate cuts.

For now, investors should expect markets to trend higher, albeit at a slower pace. Stocks may face a selloff if the Fed avoids cutting at its next meeting. But interest rates staying higher for longer also means a higher return on cash and other defensive investments.

 

For the full analysis on where markets could trend next, click here.