Easy E Market

US equity investors have had a wonderful ride over the past 16 years.  You can really say that there was only one real bear market, the one from January to October of 2022.  The Covid crash went down over 30% in February and March 2020, but lasted less than 2 months from top to bottom.  And it basically went straight up from the bottom.  That's not a real bear market.  So one real bear market over 16 years, which lasted just 9 months, and then another rocket ride higher immediately afterwards in 2023 and 2024, going up over 70% in 2 years.  

This market is straight outta Compton, its an Easy E market.  Being a passive investor in stocks, just buying index funds, shouldn't be this easy.  Stock investing was never meant to be this painless.  The reason you get higher returns in equities over bonds is because there is more risk, due to be being lower in the capital structure, and thus more volatility.  But it seems as if bonds are now more risky than stocks!  

These kind of unusual, one way markets, with valuations reaching historical extremes, have not had happy endings.  1929. 1973. 2000.  2021.  All of those market tops (except 2021, which was a plain liquidity and stimmy bubble) were characterized by a select few group of large cap stocks leading the market higher.  In 2024, the small and mid cap stocks continued to lag the large cap names, and for good reason.  The earnings growth has been concentrated in the large cap stocks, in particular, big cap tech.  Those who are looking for a mean reversion towards small cap stocks are ignoring the earnings fundamentals of those smaller companies.  They have lower profit margins, many are unprofitable, and many are in decaying businesses with low barriers to entry and lots of overseas competition.  

More and more, capitalism is becoming more crony and concentrated, with regulatory capture and lack of antitrust enforcement leading to more oligopolies and monopolies.  This is unfavorable for smaller companies that have to compete against much more profitable and powerful companies, who can bully the smaller players.  Like Walmart using their buying power to squeeze their suppliers for lower prices.  Same goes for Facebook and Google squeezing their advertising customers for higher ad rates because there are no alternatives.  The larger companies expand their margins at the expense of the smaller companies and consumers, resulting in the rich getting richer, and the middle class and poor getting poorer.  

None of this changes with Trump back as President.  I don't expect much change at all despite all the optimism about tax cuts and deregulation.  Washington is a huge swamp, and there are tons of lobbyists and insiders who don't want change.  

The hype surrounding tariffs is overblown, just like it was in 2018 and 2019.  At least this time, it seems like most investors are seeing tariffs for what they really are, just a negotiating tool to try to coax better trade deals, not a long term strategy to increase US manufacturing.  The problem for Trump is that China and the other major US trading partners know this and will go to the brink, because they know that Trump won't sacrifice the US stock market and the US economy to try to win trade deals.  

What is priced in, and expected by the majority of investors is an optimistic outcome for the US economy.  So even if there are no long term tariffs implemented, there is a lot of room for the US economy to disappoint.  I see very few discuss the implications of less immigration into the US, which is negative for growth.  In a low cost labor shortage situation that the US is in, less immigrants puts a constraint on growth, while also increasing wage inflation, which will hurt margins for businesses relying on cheap, immigrant labor.  

Due to an aging population and less population growth, economic growth will likely disappoint over the next 4 years.  Bonds should make a better investment than stocks during Trump's 2nd term, something that would surprise many.

The COT data for SPX futures shows some dramatic positioning changes among asset managers.  They have aggressively pared back their monster net long position, to now get to levels that were seen nearly a year ago.  All the build up of those longs from May to December 2024 have been liquidated.  

This is similar to the asset managers reducing their extreme net long positions in the 2nd half of 2021, even as the SPX was making higher highs and higher lows.  It appears that we reached a sentiment top in the market in early December, and while we likely reach new all time highs, it will be with less enthusiasm among the investor community.  That is actually a bearish sign, because all of the major tops over the past 25 years (2000, 2007, 2021) happened as optimism topped out months before prices topped.  There is probably a few more months left for the market to grind higher amidst waning numbers of bulls, based sheerly on momentum.  But once that momentum dries up, which it likely does sometime in the next 6 months, there is a lot of downside fuel with all the overvaluation and high US equity positioning among households and foreign investors.  

Last week we got the fake breakdown panic move under SPX 5800, which spring loaded the market to shoot up after the CPI came in softer.  It looks like the 1 month long pullback starting with the sharp FOMC day drop on December 18 is now over.  That is about standard course for choppy pullbacks in a bull market.  You rarely see more extended pullbacks in an uptrend like this, unless of course, the uptrend is over.  But that is not my base case.  Considering how much asset managers purged their SPX futures long positions, I would expect another spurt higher in the coming weeks.  

Unfortunately, I sold too early last week, expecting a short term pullback which never came.  I am looking to get back in the long side, in small size, if we get some retracement this week.  I am not sure I will be getting it, as this market now seems poised to make new all time highs within the next couple of weeks.