Best Day, Worst Day

Depending upon your point of view, markets have either disappointed you lately or performed as expected. Life is unpredictable and so are markets. That’s the theme for this week’s musings - you never know what to expect.

The 1991 movie, “City Slickers” helps prove that point. Here’s some trivia about the movie:

• The film was a success at the box office and in the award category. The film made more than $179 million on a $27 million budget. While the film has some serious moments, it’s a comedy. Jack Palance won the Oscar for “Best Supporting Actor” and, let’s not forget his pushups during his acceptance speech at age 73.

• While Palance, according to Billy Crystal was the pick from day one for the role of Curly. However, he had a conflict. The role then went to toughman Charles Bronson. Bronson rebuffed the offer when he learned the character died halfway through the movie. Palance was able to join the cast after getting out of his obligation.

• Rick Moranis was originally cast as Phil, but had to leave production when his wife fell ill. Daniel Stern filled the role admirably.

• The scene in the movie where Mitch’s mother calls him at 5 o’clock in the morning to re-enact his birth is word-for-word what Billy Crystal’s mother would say every time she called him early in the morning to wish him a happy birthday.

• If you’ve seen the film and didn’t pay attention, this movie was the acting debut of Jake Gyllenhaal as Mitch’s son.

Here's what we've seen so far this week..

Best Day, Worst Day. The markets have left investors guessing, which may not be a bad thing. The Fed has moved to the sidelines and AI names have struggled of late. The characters in “City Slickers” play their own little guessing game. For Ed Furillo, played by Bruno Kirby, his dad walking out on the family was both his best

and worst day. But for Mitch, he tells the group of his “best day” attending a Yankees game with his father, seeing Mickey Mantle play, and stating that he still has the program. This was a true story from Billy Crystal’s own childhood and he actually did get Mantle to sign the program - twice. Since peaking on December 17th of last year, Mag 7 stocks have trended lower, overall. This is probably a healthy thing as valuations had reached extremely elevated levels. However, since December 17th, the S&P 500 Equal-Weighted Index has improved. In fact, the number of advancing stocks versus the number of declining stocks had weakened toward year-end.

Since January 14th, the number of advancing stocks is at least 84% of the S&P 1500 Index. So, breadth has improved slightly, while Mag 7 is not really contributing that much. That’s a healthy thing. Meanwhile, the end of January gave us a hint at the remainder of the year as viewed through the lens of the “January Barometer.” The general premise is that as January goes, so goes the rest of the year. For example, when the S&P 500 is positive for the month of January, the market ends the year positive a majority of the time. This year, the S&P 500 finished January up more than 2%. In years when January is up more than 2%, going back to 1951, the equity index finished the year higher 87% of the time, with an average return of 18.4%. What's more, the opposite is also true. Going back to 1981, when the S&P 500 Index finished negative for the year, January started the year off in negative territory. When January was negative, the year finished in the red 6 of the last 8 occurrences. If recent returns are any indication, it’s likely that if equities follow suit with historical norms, returns for equities could come from outside the Mag 7.

What Else Is There? Sometimes investors what to know more and sometimes it’s not that complicated. There is much angst over some of the changes in

Washington D.C., but one thing is know is that change is constant. What’s more important is that there are usually signals that can provide some sense of immediate doom and to our surprise, we just haven’t seen them rear their ugly heads (yet). Volatility will typically see an uptrend leading up to a major market even. For the past 5 months, we haven’t seen any sustained trend higher in the VIX Index. It has been rather range-bound hovering around the historical average of 19.5.

While it’s not reasonable to expect that trend to remain long-term, for the time being, the VIX has been below average. Over the past 3 weeks, the VIX has spiked at the beginning of the week, only to settle lower by the end of the week. The typical measures of something volatile going on the economy do not appear evident as of yet. Both the St. Louis Fed’s Financial Stress Index and the Chicago Fed’s National Financial Conditions Index are at multi-year lows and have been trending lower. As investors stress over the changes in D.C. the two indices together track over 120 different metrics and are not showing signs of worry at this time. When asked to say something (spoiler alert) at Curly's funeral, Cookie makes a brief comment and is asked by Mitch, "That's it?" To which Cookie responds, "What else is there? I got chicken burnin'."

Day Ain't Over Yet. Just because there are no immediate signs of market mayhem, that doesn't mean that investors should disregard being vigilant.

The Jobs Report came out this morning and disappointed expectations. The market was looking for close to 170,000 jobs added to the economy, but instead, only 143,000 jobs were added. However, the bigger story is that the revisions to last year's jobs were finalized. According to today's report, more than 600,000 in 2024 were revised lower. In addition, the JOLTs number this week showed that after two consecutive weeks of improvement, the number of Job Openings resumed the two-year trend of heading lower. This should be a concern primarily because, as we stated last week, the US consumer will become much more important to economic growth in 2025 now that spending is being cut from the federal budget.

If consumers have less money in their pocket because there are fewer jobs available, that could curb future spending. The other major concern, which we have been mentioning for the past several weeks is the elevated valuations, especially among the top Tech names in the S&P 500. In fact, US households continue adding to equities, with the percentage allocation reaching a 70-year high. One of the biggest risks is that earnings expectations among Mag 7 names has reached a level that, at some point, will become insurmountable. Regardless of how well AI is able to perform and how much potential it has, the expectations on earnings will reach multiples that will be offset by actual earnings being unable to reach stratospheric levels. For now, the markets are in solid shape, but there will come a day when investors will experience some pain as that is the price for investing over the long-term. As Curly said in "City Slicker" when sarcastically asked by Mitch if he had killed anyone today, "The day ain't over yet..." Investors have time to rebalance and make sure their portfolios match their risk tolerance.

Here’s Jack Palance’s Oscar Acceptance...

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Disclosures

The information contained herein is for informational purposes only and is developed from sources believed to be providing accurate information. The opinions expressed are those of the author, are for general information, and should not be considered a solicitation for the purchase or sale of any security. The decision to review or consider the purchase or sell of any security should not be undertaken without consideration of your personal financial information, investment objectives and risk tolerance with your financial professional.

Forecasts or forward-looking statements are based on assumptions, may not materialize, and are subject to revision without notice.

Any market indexes discussed are unmanaged, and generally, considered representative of their respective markets. Index performance is not indicative of the past performance of a particular investment. Indexes do not incur management fees, costs, and expenses. Individuals cannot directly invest in unmanaged indexes. The S&P 500 Composite Index is an unmanaged group of securities that are considered to be representative of the stock market in general.

Past Performance does not guarantee future results.