The start of 2025 has been quite a rollercoaster, and for many folks, it probably hasn’t felt too great. But oddly enough, after the first five trading days of the year, the S&P 500* somehow produced a modest gain of 0.25%:
Why point this out? Because of “the rule of the first five days,” which we’ve mentioned in the past. We pay attention to this metric as it often provides a directional signal for stocks for the full year.
For example, since 1950, when the S&P 500 is positive in the year’s first five days, the full year average return is 13%, with a win ratio of 82%. Conversely, if it's negative, the yearly average is 3%, with a win ratio of only 54%:
Looking at more recent history over the last 10 years, the equity markets have been positive for the full year in five of those seven years, with 2015 and 2018 being the exceptions:
Perhaps most interestingly, the five positive years in this time frame all delivered gains of 20% or more for the full year.
We point out this “rule” because of the seemingly meandering market so far this year. Just because the calendar flipped, it doesn't mean equities should suddenly weaken, regardless of the current gloomy narrative that’s increasingly popular.
First and foremost, we think equity markets are reacting negatively to higher yields. As of this writing, the 10-year Treasury yield peaked at around 4.65%, which have been pushing higher since early December (4.1%):
Admittedly, it’s not entirely clear why long-term yields are rising. Things are unclear.
But for now, it seems that much of the move is attributable to the Federal Reserve’s “hawkish rate cuts” on Dec. 18, last week’s release of services data from the Institute of Supply Management (ISM), and the November Job Openings and Labor Turnover Survey (JOLTS) report.
Regarding the ISM data, we think there was a negative reaction to the angst around potential tariffs and other unknown impacts that some view as adding to a risk of inflation:
As of today, we’d counter that by pointing out there is no data suggesting inflation is resurging, despite popular fears. We’ve covered inflation extensively over the past few years and currently it comes down to four key drivers:
- Housing (weakening)
- Auto insurance (softening)
- Used vehicles (not accelerating)
- Labor markets (Fed said they’re “not inflationary currently”)
So, there’d need to be a new driver of “surging” inflation. Many people point to tariffs. Without getting too detailed, keep in mind that in a worst-case scenario, tariffs are a one-time rise, not a permanent rise in the rate of change.
Furthermore, the incoming administration won on high inflation. We would argue it's extraordinarily doubtful that he would want to trigger inflation again.
Secondarily, when looking at the JOLTS report, while stronger (meaning more job openings), the ratio of openings versus available workers is still at 1.13 times, which is below the 1.22 times pre-pandemic average:
This is why the Fed noted that labor markets are not currently a source of inflation.
Despite a turbulent start to the year, as we sit here today, the data suggests the fundamentals are still the same as 2024. If this view is correct, then the rise in yields is a false flag and not supportive of things becoming structurally bearish.
That said, we’d be remiss in not acknowledging that there has been technical damage to equities in the short term. This is reflected in the rise of the CBOE Volatility Index# (VIX), often dubbed the market’s “fear gauge”:
We’ll continue monitoring the VIX and equities’ near-term challenges.
Turning to the trusty Big Money Index (BMI) from our friends at MAPsignals, near-term technical worries are reflected there too. Remember, the BMI is a 25-day moving average of “big money” investor activity. It’s been under significant pressure lately and recently dipped to around 42%:
What’s causing the downdraft?
Digging under the surface, we can see that it's clearly a lack of leadership thus far. We think that’s reflective of the murky visibility to start the year.
But it’s important to note that we aren’t seeing extreme action increase. There is no capitulation. In fact, recent selling (green circle) does not compare to actual capitulation we saw in August (yellow circle):
This brings us back to the question: what’s causing all this recent pressure from the spiking yields?
Since it’s not resulting in extreme “big money” action, we think the pressure is further support for the thesis that a lack of short-term visibility is causing uncertainty – and investors hate uncertainty.
This isn’t new, and we know that because of sector data. The rate-sensitive areas are being hurt the most.
I’m talking about real estate:
And consumer staples:
On the flip side, inflationary winners like energy are jumping:
This is important because as we navigate this current landscape, we’re able to identify new sector leadership as money rotates. Energy flew to the top while technical scores for staples and real estate remained among the lowest:
Understanding all this helps provide some clarity and maintain perspective during a cloudy and uncertain start to the new year.
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*Past performance does not guarantee future results.
*Investing involves risk and you may incur a profit or loss regardless of strategy selected.
* The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market.
# The CBOE Volatility Index is a measure of the short-term volatility of the S&P 500 indexes, indicating how quickly market sentiment changes and the level of investor confidence or fear in the market.
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