Did Santa come early this year?

At my 17th annual Lancaster Chamber of Commerce speech this week, the first question from this group of 500 business leaders asked about my thoughts on bitcoin. This hot topic, which arose through the week, came just after the previous evening’s dinner discussion regarding the collapse of a Lancaster-based ATM group which has the markings of a potential Ponzi scheme. Earlier in the week in Coral Gables, an advisor shared that her 90-year-old client purchased bitcoin 10 years ago. "She has diamond hands and is killing it!” Elsewhere, mega cap tech, which had been quiet, roared back to life in recent weeks. But this week momentum stocks, which had been on such a tear, suddenly screeched to a halt (including a 98th percentile d/d move), without an obvious cause. The macro picture was unchanged, with credit spreads tight and inflation expectations tethered, but, if only for a moment, winners were losers and losers winners. The S&P 500 just finished nine straight days of decliners outnumbering advancers, the longest streak since at least 2004 when Bloomberg started gathering the data. This, as the market stands right near an all-time high. Hmm. Nonetheless, the US equity market has been very strong, despite pricey valuations, and still looks appealing, given seasonality, the favorable jobs report and an expected rate cut. S&P 500 revenues were at record highs in Q3 for the first time since the last quarter of 2023, with most sectors showing strength. Revenues rose 6.9% y/y, versus the 4.5% long-term average. This is particularly noteworthy since inflation is well off its peak and the global economy, in contrast to what we’ve seen domestically, is weak. Earnings per share also rose to a new record and profit margins increased to 12.6%. Strategas notes that stocks have a tendency to consolidate after a presidential inauguration but for now the market looks good—if without much margin for error.

So, what could go wrong? Well, consumers have never been this optimistic about future stock market gains, not even in 2000. If retail investors are late to the party, that could bode ill for the market. The Fed could add to this exuberance. The central bank is almost certain to cut this month, per market expectations, even as disinflation seems to have stalled. Tone matters, and if Jerome Powell remains dovish, this fairly hot market could overheat. Geopolitical risk continues to be high, with the power vacuum in Iranian proxy-state Syria the latest flashpoint. As goes Trump’s policy goals, might Elon Musk’s Department of Government Efficiency (DOGE) work too well, cutting so much government spending that GDP suffers? Might tariffs be pursued too energetically thus hitting economic growth? If Europe were to fall into recession, that could be tricky for the US. German industrial production has fallen three of the past four months and now stands at 2005 levels (!), down nearly 15% in the past six years. Here at home, judging from the NFIB optimism index, small businesses are excited for the deregulatory, domestic-oriented Trump agenda. Still, their profit outlook remains clouded by sticky labor costs, with many respondents planning to hike pay over the next three months. Might wage inflation get stuck at elevated levels? Doubtful. The job finding rate has fallen back to the levels of 2014-15. Layoffs are still low, but the unemployment rate may rise if new positions are harder to find.

The most common worry voiced as investors and business leaders anticipate Trump is tariffs. In their Q3 communications, companies spoke of three main plans to grapple with tariffs: pass them along to consumers, build up supplies before Trump is sworn in, and seek alternate sources of supply. A less-obvious route might lie elsewhere in the administration’s agenda: while tariffs will increase input costs, potential corporate tax cuts should be able to offset that, particularly at a time when commodities are cheaper thanks to the malaise in Europe and China. So far, tariff threats have not even been about trade or domestic production, at least expressly. Rather they have been framed in terms of immigration, fentanyl and currency. Is free trade really the norm on these shores? Interestingly, tariffs were once the biggest source of federal revenues in the US, producing half the government’s income in the period after the Civil War. One group is eagerly anticipating Trump 2.0: small business owners. The National Federation of Independent Business’ optimism level surged by a record amount in November. The percentage of small business owners who think it’s a good time to expand their business also jumped. A similar spike in small-business optimism was seen in late 2016 after Trump’s first win. Earlier in the week in Coral Gables, I passed an elderly veteran using his walker.  Thanking him for his service, he replied, “It’s good to be alive; enjoy every day of your life.” Words to live by, plus keep your sense of humor near! Discussing the rise of the female investor, an advisor shared her father-in-law’s observation in the ‘90s: “Women will eventually control most of the wealth, along with other goings on at home…”

Positives

• Consumer inflation good enough for the Fed The consumer price index rose, as expected, to 2.7% y/y on a headline basis and 3.3% excluding food and energy. Rent and services inflation are both moderating, albeit slowly, but the “last mile” of inflation reduction is proving tough. CPI ex-shelter is up 1.6% y/y, while CPI services ex-shelter rose 4.1% y/y. Hmm. The New York Fed says consumer inflation expectations remain steady at just under 3%, with consumers seeing lower prices on items they frequently buy.
• Small businesses hire 80% of us The NFIB’s small business optimism index jumped in November to a cycle high of 101.7, the best reading since June 2021, ending 34 months of subpar readings. Business uncertainty fell from elevated pre-election levels. Capital spending intentions for the next six months increased.
• Soothing words China said it would stimulate its economy further, pledging to implement “extraordinary counter-cyclical” policies. So far, most of the Chinese government’s measures to renew faith in its economy have involved signaling and communication. Still, household spending there has increased lately, with retail sales and even real estate picking up. Two prominent state-owned developers paid a record amount last week for a 65-acre parcel of land in Shenzhen.

Negatives

• Blame the headline number The producer price index jumped 0.4% m/m in November, against an expected 0.2%. The worst of this, however, came from increases in food prices. Core PPI rose a mere 0.1% in November, beating expectations of a 0.2% m/m rise. Core PPI rose 3.5% y/y and has been near that level since May. Separately, import prices rose 0.1%, above consensus, partly due to a 47% increase in the price of imported natural gas.
• Productivity chills slightly but so do costs Nonfarm business productivity rose at a 2.2% annual rate in Q3. This is in line with expectations but marginally down from previous levels. The bright spot is that compensation per hour was revised down to a 3.1% rate versus preliminary estimates of 4.2%, driving unit labor costs down to 0.8% from a prior 1.9%.
• Death by a thousand cuts The European Central Bank cut rates by 25 basis points. On the one hand, the bank dropped its previously hawkish language to instead insist it would pursue a “data-dependent and meeting-by-meeting approach.” On the other hand, given Germany’s weakness and the political disarray on the continent, a bolder move might have been in order.

What Else

Threepeats are rare Barring a market downturn, this is likely to be the second straight year in which the S&P 500 rose more than 20%. The only instance of three straight 20% gains in the history of the S&P 500 was in the late 1990s, when the index rose more than 20% four years in a row (1995-98).

Keep them guessing A recent article argues that President-elect Trump's strength partly lies in him being an "accidental master" of game theory. The gist of the idea is that choosing unpredictably from an array of options gives the game theorist a secret source of strength.  

Maybe Trump will want this in his toolkit Google recently developed a new chip called "Willow" that is so fast that, in the view of its developer, it "had to have 'borrowed' the computation from parallel universes." Specifically, the chip completed a task in five minutes that would take a supercomputer 10 septillion years to finish.