Breaking Down the Market: Which Factors are Driving Performance?

In this episode of The Money Runner, David Nelson, CFA, dives into the latest market trends, including the S&P 500’s performance, rising bond yields, and their impact on stock valuations. Discover what’s driving investor concerns, the sectors leading the charge in 2025, and the economic factors weighing on market momentum. From inflation data to Fed policy shifts, we break down the key insights you need to navigate the financial landscape. Don’t miss this deep dive into market signals and strategies for smart investing. 

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

0:03

All right. We're going to kick this off. We're going to cover a lot of ground today. And I'm going to try to tag on to a conference call we did. Here at Belpointe with our advisors around the country. So good to. Show a lot of charts. I'm sure there'll be a lot of questions and hopefully we can get a few answers. All right. Let's let's look at this first one. S&P 500. Pretty standard chart. The good news, it's up into the right. So the glass is half full. And that green line that you're looking at. Is blended EPS. For one year. Blended is looking six months forward. Six months backwards. Currently around 271. Dollars, maybe down a little bit from what it was a couple of weeks ago at around 274. But all in pretty good news. I think maybe, you know, some of the. Concern in the market on this next slide is despite the fact that we're going to have growth of about 14% year on year for 2025. It's not cheap. We're at around 22 times 22 times earnings. That's the p e ratio. It's elevated. No question about it. It's not the highest I've seen in my career. But it's expensive. But I don't think that's really the only, only problem. We are less than 3%. Below the all time highs. And I'm speaking to you as of Thursday this week. So I'm not going to have Friday's information. Of how the market closed on Friday. So, of course, anything could happen. But it's pretty clear there's something. Weighing on this market. And you can see it really when you blow up that chart. I've painted, the Dow moves in red. It's a it's a, you know, a candlestick chart. Green is up, red is down. And you can see that big gap down. That was the December surprise. That was a Fed day, December 18th. You see the volume on the bottom there. That was the highest volume. Day for the S&P 500 all of last year. So that's not good. When you see a. Big gap down on high volume. Take notice of that. And it's pretty clear we're going to have to get above those those highs, the kind of repair, all that damage. So it's very clear something is weighing on. Investors mind and weighing on the psyche of the market. I think we all know what that is. We're gonna have to dig in and find out. Welcome to the Money Runner. I'm David Nelson. Stock investors always seem to have. Something to worry about. Could be earnings, potential recession. Geopolitical risk, company risk, systemic risk. But most most of the biggest problems for stocks start. In the bond market. And that's what I think it is this time. Take a look at this chart. Of ten year yields and this is going back. Five years. And you can see. That we are breaking out of that channel and pushing higher. Now, the good news is we haven't touched that 5% level that that peak rate we saw back at the end of 2023. I'm going to have a chart about. That and what it meant for stocks in just a second. But we have broken out of that channel. We did have a good day in in bonds maybe over the last couple of days on some what is perceived as better than expected inflation numbers. But this has. Been a problem and it's been a problem really. For the last couple of months. I'm going to show you when all this started. Part of why this is happening. Is this next chart here. Term premium on a ten. Year zero coupon bond. What what is that kind of wonky stuff where you're looking at there in that. Short what that chart is telling you. Is. Term premium is the amount of return a bond investor wants to get above and beyond a short term security for taking the. Risk of extending his duration. And you can see that this has been trending higher. And now this chart goes all goes back several decades. It goes back all the way to 1990. And you can. See that we've broken that downtrend. In fact, if this was a stock chart, I'd want to buy it. Because that's a that looks like it's breaking out and it might push higher and that's bad news for stocks. Higher yields generally means lower multiples. And if we're gonna have lower. Multiples, then that means the. Earnings growth has to be that much higher. For for stocks to support themselves. Now, we had a fair amount of inflation news. This week earlier in the week. The first one up was. The CPI Producer Price Index. This chart goes back five years now, if I'm told it was better than expected. But this chart does not give me a lot of comfort. It almost looks like it's trying to break out to the upside here. In fact, on that day when they when it was reported ten. Year bond yields, the long end of the curve actually pushed a little. Higher kind of kind of a negative here. The better one was the CPI, which came out on Wednesday. And stocks love this news. I mean. We had a monster day. On Wednesday and it. Almost looked like the the bull market of. Old tech, the great. Large secular. Growth, the great. Financials were. Killing it. Financials actually started reporting. On Wednesday, and for the most part the numbers were great. BlackRock, Jp morgan, Wells Fargo, Citigroup, all great numbers and all the all those stocks pushed a lot higher, a very, very positive day. And yet we have this weight on our heads, you know, on the market. And we keep going back to when we keep looking at what yields are doing and we keep. Looking at this chart right here. U.S. yield curve. And it's not a pretty sight and it frightens stock investors that yield curve on top. That's today. Right? The yield curve on the bottom isn't that long ago. That was taken as a snapshot from September 16th, right around the time the Fed made its initial cut. Of 50 basis points. And what was the, you know, the start off of what was supposed to be a very aggressive recutting cycle. And, of course, now we've learned that it's not going to be as much as we had thought. Nevertheless, this has become a problem. The ten year yield since then are up over 100 basis points. That's a substantial move, and it's a substantial loss for any bond investor. That was invested on the long and of the curve. Now bonds are pretty oversold. In fact, I made a trade recently. Almost a swing trade, and bought 20 year treasuries for some tactical portfolios. We'll see how that works out. It is designed. For a short term move. Not necessarily a secular position that I'm going to hold for for for a long period of time. But nevertheless, these bond yields are a problem. And in fact, the short end of the curve is a problem as well. Because even though we had a monster move in stocks, you would have thought. They were moving higher because of an anticipation that there was going to be more aggressive on the rate cuts than we had perceived. Not showing up in Fed fund futures yet. The first chart here you're looking at, that's a snapshot from last week and that's maybe at most two by two cuts to 25. Basis point cuts from where we are today puts you somewhere below or around 4% by the end of this year. The chart snapshot on Thursday, the day after. That monster move in stocks almost the same place. So it's. Not showing up in Fed. Funds futures yet. Just yet. When you're looking at the broad market, the first thing you have to identify is what's working, what. Isn't, and what's. Next. And when you look at a sector chart that's up on your screen right now, it is almost the inverse of what we. Had last year. On top energy. Energy is killing it up over 8% year to date and we're only two weeks. Into the year. Industrials doing well. Other cyclical sectors like materials. Doing well on the bottom, technology and consumer staples. Yet inside that technology sector, there's a lot of stocks doing very, very well. But for most of them, the market caps are a little bit smaller and it's not some of the usual suspects. Apple had a very bad day today. I'm recording this on Thursday, down. Over 4%. I think that was maybe the worst day since August. But underneath the tech sector, there were a lot of other names working. One of the things, one of the tools I use. When I'm trying to identify what's driving the tape is factor performance. I've run a quantitative equity portfolio called Alpha Select, and, you know, factor performance is a big part of the analysis that I need to do for that portfolio. And when I look at factors, I try to look on a long, short basis where you go long. The best part of the factor go long the worst part. Let me give you an example of that. You're looking at a chart from last year. Some of the the major factors in a market. Momentum or price. Momentum was the best performing broad factor last year. It started rolling over towards the end of the year and you saw that showing up in some of the largecap secular growth names. But in a long. Short fashion. You're long the highest momentum. You're short the lowest momentum. The worst performer last year was value. And in that factor, you be long, cheap, short, expensive. And the others were somewhere. Somewhere in the middle. Now, so far, year to date, it's kind of. Early to say up momentum and growth that they are on top. We're only two weeks into this and it's only the start of the earnings season. And frankly, we have a lot ahead. As a matter of fact, on Monday is a is inauguration day. Expect a flurry of news coming out of washington. President Biden, I think made 300 executive orders right out of the gate. I don't know if Trump will do as many of them, but embedded in those executive orders will be a lot of information and a lot of those executive orders are going to affect the markets in some fashion. So expect a lot of activity next week. We're going to have a lot on our plate and we're going to have to examine this in the days, weeks and months ahead. All right. I'm going to cut it short today. It's late, and I'd like to get home to my wife. Don't forget, if you want to learn more about David Nelson or the Money. Run a podcast, please go to my substack site. dcnelson123@substack.com. I'm David Nelson. And this is The Money Runner.