2025 Market Mission Brief! Your Biggest Risk Is Not Taking One

"2025 Market Mission Brief! Your Biggest Risk Is Not Taking One"
Step into 2025 with a game plan. We cover a lot of ground in this week’s podcast. AI Tech spending may be bigger than even bulls believe but every bull market has an Achilles Heel and this one is no different. Check out Enemy #1. 

Disclosure: "At the time of this article I currently hold shares in some of the companies mentioned as part of investment portfolios in funds I manage for Belpointe. Additionally, I may discuss other securities that are under consideration for future investment; however, discussing these securities is not a recommendation to buy, sell, or hold. My mention of these securities reflects my personal opinion and analysis at this moment and may change without notice. Please remember that all investments involve risks, including the possible loss of principal."

Transcript

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The watchword for your 2025 playbook is change. It's the only constant. Expect surprises. Roll with it. Be prepared to act and react to incoming data. Those with a rigid view of how markets will perform this year probably have one chance in ten of getting it right. We have significant economic and market challenges to overcome geopolitically. The world is splitting at the seams. The debt hangover is just beginning, and governments globally are being forced to make draconian decisions as the can kick down the road for decades finally comes to rest. Sounds awful, doesn't it? Well, there are two sides to every story, and the other side of this narrative is as promising as the above is depressing. What was once science fiction is now real. The productivity boom from AI and other new technologies could reach levels that were impossible just a few years ago. Science and technology are advancing at a pace that is increasing exponentially as capital markets fund innovation and growth. Your mission, if you choose to accept it, is to navigate this journey. Balancing Calculated risk and capital preservation. Knowing full well your biggest risk is not taking one. Welcome to the Money Runner. I'm David Nelson The knee jerk reaction to two back to back years of 20 plus percentage returns for U.S. equity markets is to ring the cash register. We certainly saw a lot of that in December. May still see more this month as advisers managing client money, rebalance accounts, taking profits in megacap favorites forced to delay their sales until after the start of the year to avoid the cap gains hit this April. It will be interesting to see if they make good on that decision. The bad news is that if these giants continue to perform, it will become increasingly difficult to keep up with popular market cap weighted indices. The good news is it may not matter. There are a lot of choices beyond the Mega-Cap community and dozens of industries offering growth and yes, some even trading at a reasonable price. As your mission commander, I've highlighted some of the risks, but I implore you, focus on enemy number one ten year rates. That's the one risk that might be beyond our control. We've seen repeatedly since the start of this bull market that stocks struggle when rates hit, levels that compete with equity returns. The Fed can react to incoming data and adjust their game plan, even Washington can pivot. If enacted, policy produces an economic outcome that's less than desired. But the long into the curve is responding to data that may have finally hit levels. Investors can no longer ignore. I've said it before in my podcasts and publications that every bull market has an Achilles heel, and this one's no different. As a nation, we are running debt and deficits that are starting to concern our creditors. They are increasingly demanding higher rates of return to lend us money. Deficit spending in the United States been a tool embraced by both political parties for as long as I can remember. In the last half century, the only time we made it into the black was under Bill Clinton. Briefly, on the heels of an Internet boom, a couple of unpaid for wars, the great financial crisis, and finally COVID wiped out the surplus. Even without those catastrophic events, the trend is clearly in the wrong direction. The rate of change of debt accumulation accelerated following 08 and then again in 2020 as the world ground to a halt. And since then, we have embraced crisis debt accumulation as the baseline. We can't continue that. I look at that first chart and the solutions are obvious. We can either slow down spending or increase GDP. The good news we might have a shot at both. The first step in solving any problem is recognizing there is one. Today, governments are at least acknowledging the obvious. Any rational view has to start with spending. DOGE is certainly a step in the right direction, and if nothing else is exposing waste and fraud that has long been accepted as the cost of doing business. I recognize that one man's waste is another source of income, and change won't come easy. But the conversation alone will help keep the problem from getting worse. In a holiday shortened week, Friday's tech led rally. Maybe it's not that important comes following weeks of profit taking. But it was hard not to notice what I believe was one of the key drivers forcing buying that didn't abate until the final minutes of trading. Listen to this statement. In full year 2025, Microsoft is on track to invest approximately 80 billion to build out AI enabled data centers. That statement is from Brad Smith, vice chair and president of Microsoft. I don't know what to do with the number, but it has to be in part responsible for Friday's risk on day. Does he mean total CapEx for Microsoft will be 80 billion, which would imply a $17.9 billion increase from current consensus estimates? But even here, it's confusing because he says 80 billion to build out A.I. enabled data centers included in the current 62 billion CapEx estimates for fiscal 2025. Are all the other expenses Microsoft oft has that have nothing to do with AI data centers? One thing is certain we need some clarity. But either way, it appears that Microsoft oft is going all in believing the eventual return on investment justifies this massive increase in spending. Brad needs to clarify these remarks, but no matter how you look at it, A.I. tech spending may be rising even faster than bulls believe. The arms race is on in what is rapidly looking like the most important technology shift in our lifetimes. The operational tempo is going to start to pick up this week. The A-Team will be back on the field as the street gears up for a new year. New opportunities and new challenges. This week we have some key data, including FOMC minutes and nonfarm payrolls. And of course, we are just days away from the start of another earnings season. If you want to learn more about the money, run or yours truly, please visit my substack site. dcnelson123@substack.com. I'm David Nelson and this is The Money Runner.