January Update - What's in store for 2025?

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We are fundamental investors that use technical analysis to manage short-term market risks. We believe that risk management is not a choice, but a necessity. While we cannot control how much downside the market provides during a correction, we can control how much of the downside your account receives. We aim to avoid 60% or more of the decline in any significant downturn. Without our process, there is a good chance you will experience 100% of the downside from the market. We will help you navigate the risks and rewards of the market so that you can stop worrying about your money and start living your life. 

 

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December was a difficult month in the markets.

We increased out weightings in Dream Industrial REIT and CN Rail. Both names are at the bottom of their trading ranges.

 

We took profits and sold Ferguson Enterprises on disappointing results and move the proceed into Gilead sciences. Gilead offer a better valuation and a higher dividend.

We took profits on Lundin Gold (up 82%). While we still like to position, as its valuations have become a bit stretched.

We added 2 Alberta based electrical providers in Transalta and Capital Power. Both of these names could see significant upside if Alberta data center co-located deals materialize.

We have 20% of the account in cash and are looking to add on any pullbacks.

Asset Mix in December

Returns for our 60/40, 70/30 & 80/20 portfolios - before fees:

Interesting Charts

And now for something we think you'll really like to read

Technical Comments

https://www.brookstradingcourse.com/price-action-trading-blog/

• The December candlestick was a bear bar closing near its low with a small tail below.

• Last month, we said that the odds slightly favor the market to trade at least a little higher. Traders would see if the bulls could create more follow-through buying in December, or if the market would trade slightly higher but stall and close with a long tail above or a bear body instead.

• The market traded slightly higher in the first half of the month followed by sideways to down from mid-month onwards.

• The bulls created a large wedge pattern (Mar 21, Jul 16 and Dec 6) and an embedded wedge (Aug 30, Oct 17, and Dec 6).

• They want the market to continue in a broad bull channel for months.

• If there is a pullback, the bulls want it to be sideways and shallow (filled with weak bear bars, bull bars, doji(s) and overlapping candlesticks) and form a higher low or a double bottom bull flag with the September 6 or August 5 lows.

• They want the pullback to have poor follow-through selling.

• The bears want a reversal from a wedge (Mar 21, Jul 16 and Dec 6) and an embedded wedge (Aug 30, Oct 17, and Dec 6).

• They managed to create a sell signal bar in December and triggered the sell entry by trading below the December low recently.

• They must create consecutive bear bars (something they haven’t been able to do since Oct 2023) to show they are back in control.

• Since December candlestick was a bear bar closing near its low, it is a sell signal bar for January.

• Odds favor January to trade at least a little lower (which it has done).

• The move up since October 2023 has lasted a long time and is slightly climactic.

• While the risk of a pullback increases, the bears need to do more to show that they are back in control.

• Until they can do that, traders will not be willing to sell aggressively.

• For now, traders will see if the bears can create a follow-through bear bar in January.

• Or will the market trade slightly lower (which it has done) but stall and close with a long tail below or a bull body (poor follow-through selling) instead?

• We could still see the market retest the December low again sometime in January.

• Some traders may see the December low as not being adequately tested (Jan 2).

• For now, odds favor any pullback to be minor and not lead to a reversal.

Is Optimism Too Optimistic for 2025?

By Lance Roberts | Dec 28, 2024

In “2025 Predictions,“ we showed some early indications of Wall Street targets for the S&P 500 index, and, as is always the case, optimism for the coming year is very high. The median estimate is for the market to rise to 6600 next year, which would be a disappointing return of just 8.2% after two years of 20% plus gains. However, the high estimate from Wells Fargo suggests a 14% return, with the low estimate from UBS of just a 5% return. Notably, there is not one estimate available for a negative return.

Interestingly, optimism for 2025 has taken on an interesting twist. Over the last two years of above-average returns, earnings growth has come from just the top-7 market capitalization companies in the S&P 500 index. However, analysts now expect earnings to shift from the bottom 493 companies in the index.

The optimism in these assumptions is interesting because the economy has grown strongly over the last two years, yet those 493 companies could not grow earnings. What will change in 2025? Yes, President Trump has promised to extend the Tax Cuts and Jobs Act, but that doesn’t change the previous tax rate in the last two years. He has proposed to remove tax on tips and social security, but that impacts only a small percentage of the population.

On the other hand, depending on the scale and areas of impact, deregulation could improve earnings, but much of that will have to be passed through Congress, which could prove difficult. The Federal Reserve hopes to continue to cut interest rates, but sticky inflation could slow that process, particularly if economic growth remains strong into 2025. Even if the economy continues to grow strongly, what will cause the shift in earnings growth from those dominant market players to much smaller companies? Such is particularly the case given the continued reversal of monetary liquidity in the economy, with higher borrowing costs and declining consumer savings rates.

However, while analyst’s optimism about earnings growth in 2025 is high, which would take earnings well above the long-term growth trend, those estimates are already reversing toward reality. In the last six months, estimates have dropped by $3 per share and will likely be closer to $220 per share by next year. As shown, earnings tend not to deviate from the long-term trend for long, and typically, those deviations only occur during recessions and immediate recoveries.

As discussed recently, if earnings revert toward the long-term trend, which should be expected given that earnings are a function of economic growth, the current valuations become more problematic.

“While the bullish optimism is possible, that outcome faces many challenges in 2025, given the market already trades at fairly lofty valuations. Even in a “soft landing” environment, earnings should weaken, which makes current valuations at 27x earnings more challenging to sustain. Therefore, assuming earnings decline toward their long-term trend, that would suggest current estimates fall to $220/share by the end of 2025. This substantially changes the outlook for stocks, with the most bullish case being 6380, assuming a roughly 4.5% gain versus every other outcome, providing losses ranging from a 2.6% loss to a 20.6% decline.”

But again, those assumptions are based on a continued moderation in economic growth.

 

Data Suggests A Continued Moderation In Economic Growth

However, to justify the optimism for increased earnings growth, we must also expect that:

1. Economic growth remains more robust than the average 20-year growth rate.
2. Wage and labor growth must reverse (weaken) to sustain historically elevated profit margins.
3. Both interest rates and inflation need to decline to support consumer spending.
4. Trump’s planned tariffs will increase costs on some products and may not be fully offset by replacement and substitution.
5. Reductions in Government spending, debt issuance, and the deficit subtract from corporate profitability (Kalecki Profit Equation).
6. Slower economic growth in China, Europe, and Japan reduces demand for U.S. exports, slowing economic growth.
7. The Federal Reserve maintaining higher interest rates and continuing to reduce its balance sheet will reduce market liquidity.

You get the idea. While optimism about economic and earnings growth is elevated going into 2025, there are risks to those forecasts. Such is particularly true when examining current economic data’s relative strength and trend. Subdued manufacturing activity, slowing GDP growth, and cautious consumer behavior all point to an economic environment less supportive of aggressive earnings growth. As such, investors must carefully navigate the disconnect between high Wall Street expectations and softening economic conditions.

A better way to visualize this idea is to look at the correlation between the annual change in earnings growth and inflation-adjusted GDP. There are periods when earnings deviate from underlying economic activity. However, those periods are due to pre- or post-recession earnings fluctuations. Currently, economic and earnings growth are very close to the long-term correlation.

Heading into 2025, real personal consumption expenditures (PCE) remain above real retail sales. While such deviations can occur, they tend not to remain that way long, given that retail sales comprise about 40% of PCE. Such suggests that in 2025, PCE will begin to converge with retail sales, resulting in slower economic growth rates.

The following graph visualizes the plight of the average American by showing the “gap” between the cost of living and income and savings. To fund the current cost of living, consumers must spend all of their income and savings and then subsidize the remainder with almost $4000 in debt annually. This is why total consumer debt continues to rise, which does sustain economic activity in the near term. However, the longer-term impact is slower economic growth as consumers cannot take on excess debt. Also, if interest rates remain elevated, the impact on economic growth is exacerbated.

So, if economic growth slows next year, as the Federal Reserve expects, why is Wall Street so optimistic?

 

Why Is Wall Street Always Optimistic?

When Wall Street wants to make a stock offering for a new company, it has to sell that stock to someone to provide its client, the company, with the funds it needs. The Wall Street firm also makes a very nice commission from the transaction.

Generally, these publicly offered shares are sold to the firm’s biggest clients, such as hedge funds, mutual funds, and other institutional clients. But where do those firms get their money? From you.

Whether it is the money you invested in your mutual funds, 401k plan, pension fund, or insurance annuity, you are at the bottom of the money-grabbing frenzy. It’s much like a pyramid scheme – all the players above you are making their money…from you.

In a study by Lawrence Brown, Andrew Call, Michael Clement, and Nathan Sharp, it is clear that Wall Street analysts are not interested in you. The study surveyed analysts from major Wall Street firms to understand what happened behind closed doors when research reports were being put together. In an interview with the researchers, John Reeves and Llan Moscovitz wrote:

“Countless studies have shown that the forecasts and stock recommendations of sell-side analysts are of questionable value to investors. As it turns out, Wall Street sell-side analysts aren’t primarily interested in making accurate stock picks and earnings forecasts. Despite the attention lavished on their forecasts and recommendations, predictive accuracy just isn’t their main job.”

The chart below is from the survey conducted by the researchers, which shows the main factors that play into analysts’ compensation. What analysts are “paid” to do is quite different from what retail investors “think” they do.

“Sharp and Call told us that ordinary investors, who may be relying on analysts’ stock recommendations to make decisions, need to know that accuracy in these areas is ‘not a priority.’ One analyst told the researchers:

‘The part to me that’s shocking about the industry is that I came into the industry thinking [success] would be based on how well my stock picks do. But a lot of it ends up being “What are your broker votes?”‘

A ‘broker vote’ is an internal process whereby clients of the sell-side analysts’ firms assess the value of their research and decide which firms’ services they wish to buy. This process is crucial to analysts because good broker votes result in revenue for their firm. One analyst noted that broker votes ‘directly impact my compensation and directly impact the compensation of my firm.’”

You Aren’t Important

The question becomes, “If the retail client is not the firm’s focus, then who is?” The survey table below clearly answers that question.

Not surprisingly, you are at the bottom of the list. The incestuous relationship between companies, institutional clients, and Wall Street is the root cause of the ongoing problems within the financial system. It is a closed loop portrayed as a fair and functional system; however, it has become a “money grab” that has corrupted the system and the regulatory agencies that are supposed to oversee it.

Year End Tax Planning

Contribution reminder for your RRSP, TFSA and RESP accounts

The Millennial Minute

Happy 2025 everyone! I hope you all made wonderful memories with friends and family over the Christmas holidays and are ready for whatever 2025 throws at us! Whether it's becoming the 51st state, a possible curbing of carbon emissions, H5N1... we won't lack for news this year!

For those of us who like to worry only about what's in our control, this month's article is great positivity booster towards New Year's Resolutions! We all have them in some form or another, even if you don't call them resolutions, having goals it what helps drive us to be better.

Keeping up with the goals, however, can be one of the most difficult tasks we take on. Why is that?

Check out this month's article to read more!

 

 

The opinions, estimates and projections contained herein are those of the author as of the date hereof and are subject to change without notice and may not reflect those of BMO Nesbitt Burns Inc. (\"BMO NBI\"). Every effort has been made to ensure that the contents have been compiled or derived from sources believed to be reliable and contain information and opinions that are accurate and complete. Information may be available to BMO NBI or its affiliates that is not reflected herein. However, neither the author nor BMO NBI makes any representation or warranty, express or implied, in respect thereof, takes any responsibility for any errors or omissions which may be contained herein or accepts any liability whatsoever for any loss arising from any use of or reliance on this report or its contents. This report is not to be construed as an offer to sell or a solicitation for or an offer to buy any securities. BMO NBI, its affiliates and/or their respective officers, directors or employees may from time to time acquire, hold or sell securities mentioned herein as principal or agent. BMO NBI -will buy from or sell to customers securities of issuers mentioned herein on a principal basis. BMO NBI, its affiliates, officers, directors or employees may have a long or short position in the securities discussed herein, related securities or in options, futures or other derivative instruments based thereon. BMO NBI or its affiliates may act as financial advisor and/or underwriter for the issuers mentioned herein and may receive remuneration for same. A significant lending relationship may exist between Bank of Montreal, or its affiliates, and certain of the issuers mentioned herein. BMO NBI is a wholly owned subsidiary of Bank of Montreal. Any U.S. person wishing to effect transactions in any security discussed herein should do so through BMO Nesbitt Burns Corp. Member-Canadian Investor Protection Fund.