@theMarket: Markets Await the Inauguration

"Day One" arrives on Monday and investors are waiting with bated breath to hear what and how the new administration will handle the myriad problems that beset the nation. No one knows how that day will go, and the stock market reflects that.

 

Stocks are up since the beginning of the year but not by much. Granted the total gains for the first five days of January were positive and that is a good sign for those who take stock in those kinds of portents. Normally if the S&P 500 Index finishes with gains by the close of the fifth day of the year (and it did), the "rule of the first five days" says a gain for the entire year is likely.

 

Over the last decade, this rule worked in five cases where stocks gained in the first five days. Since 1950, the market has been up 13 percent on average in those years when the 5-day rule was in force. For me, I would rather see positive developments in inflation, bond yields, and the dollar before declaring the year a win or loss for investors.

 

This week, we did have some "good news" on the inflation front. The Consumer Price Index and the Producer Price Index for December were better than analysts feared. Make no mistake, the inflation rate is still climbing just not as fast as some may have expected.

 

Inflation has been moving in the wrong for the last three months and I see it climbing again in January.  However, the data was enough to halt the steady climb higher in the U.S. Treasury, 10-year bond, at least for a day or two.  Yields have been climbing, and stocks have been declining since the beginning of December. Prior to that, stocks and bond yields were going up at the same time. What changed?

 

Expectations that the Trump Administration's tariff policies, tax cuts, and increased government spending in areas such as defense would contribute to rising inflation, rising deficits, and more debt. The argument that all these policies would allow the economy to grow its way out of the present debt and deficit crisis has left the bond market saying, "Show me."

 

It is why the financial markets are marking time, trading in a range until more information is forthcoming. Traders want to see the new regime put some flesh on the bones of Trump 2.0. The good news is that this time around, the new administration appears far better prepared to take the helm, with a better organization and hopefully a group of well-thought-out initiatives.

 

Expectations are elevated by at least half the voting population and the business community. Both small business and corporate surveys indicate a rising tide of support for the future direction of the country under Donald Trump. However, there are just as many Americans who fear this is the end of the world as they know it.

 

It appears that partisanship is alive and well and beginning to muddy what has historically been areas of reliable economic data. In the most recent University of Michigan Consumer Survey, for example, Republicans have become more optimistic about the economy and inflation, while Democrats have become more pessimistic.

 

The American Association for Individual Investors survey this week showed the highest percentage of bears in a long time while bullish sentiment hit the lowest level since 2023. Normally, I would see this as a bullish contrarian indicator but without knowing the partisan divide among participants, the data could be skewed meaningfully.

 

In any case, next week should determine the market's direction at least in the short term. The market's risk gauge, the volatility Index (VIX), does not show any increase in buying into the event which means that any volatility coming into Monday will be from the market reacting to what is said or not said about programs and policies during the day.

 

We are stuck between levels that indicate that the S&P 500 Index could regain the old highs or fall back below 5,800 based on the events around the inauguration and its aftermath. We do know that Donald Trump is quite adept at pumping up his audience. If the S&P remains above 5,848,  we should be okay.

 

I apologize for missing last week's column. In this difficult time, I wanted to be there for readers but another bout of COVID kept me in bed most of last week and this week. A special shout out to my loving wife Barbara for taking such good care of me.

 

Bill Schmick is the founding partner of Onota Partners, Inc., in the Berkshires. His forecasts and opinions are purely his own and do not necessarily represent the views of Onota Partners Inc. (OPI). None of his commentary is or should be considered investment advice. Direct your inquiries to Bill at 1-413-347-2401 or email him at bill@schmicksretiredinvestor.com.