Hi all,
Wednesday, December 18th, was the largest one-day drop for the S&P 500 (-2.95%) on a Federal Reserve rate decision day…ever. This month has been the third worst month for the equal-weight S&P vs. the cap-weighted S&P since 1990. March 2020 and June 2000 were the other two (not great).
The precedent that keeps popping up in my historical research to the current time period is 1972. August of 1972 saw the S&P 500 within 1% of an all-time high, while less than 40% of the stocks that make up the index are above their 50-day moving averages. Over the coming months, the S&P 500 rallied to new all-time highs, but then ushered in a brutal bear market as the Nifty Fifty craze came to its inevitable end. Here’s a few reasons why we remain very cautious in the first half of 2025.
- Future returns from these valuations haven’t had the greatest luck over the next 10 years. As you can see from the chart below, when starting from these levels, subsequent 10-year returns look a lot like going sideways for a decade.
2. Concentration of the S&P 500 continues to get worse. The top 10 stocks in the S&P 500 now represent almost 40% of the index. By itself, this isn’t a problem, but should those companies start to disappoint in terms of earnings expectations, the changing of the winds could be fast and impressive.
3. Sentiment is bullish and has remained bullish throughout the entire year. From Jason Goepfert at Bespoke, “This will go down as a year with among the most bullish sentiment since the 1987 inception of the AAII survey. The only two years with more consistent optimism were 1995 and 1999.” This continues to cause us pause.
4. According to Bank of America, fund managers’ enthusiasm for stocks has hit extreme levels, with cash allocations also falling to the lowest in the last 25 years.
All of these charts aren’t meant to frighten anyone, but more to say, now is not the time to be jumping into equities with both feet. Defense remains our posture until something changes (could be the FED changes its tune, could be valuations simply come back in line, or it could be something as simple as we go sideways while earnings catch up to expectations).
The Russell 2000 is already 11% off its all-time high, so we’re taking some air out of this balloon already, we just feel a little more patience is warranted.
Happy New Year!
– Adam