Uncertainty Is Certain

Daren:
[0:01] All right. Happy Saturday, everyone. This is Daren Blonski with Sonoma Wealth Advisors. My partner, Chris, is in air, flying back from work this week. And so it will be just me today wrapping up the markets and the economy. Overall, a really solid week. The pro-business approach that seems to be happening with Trump's inauguration seems to be playing well for the market. And we generally had a pretty good week across the board. So we'll talk a little bit about the nuances of that and go through the economy in depth and the markets today. We'll be right back after this. We'll.

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Daren:
[1:16] See you next time. All right well let's dive into it so i always like to start off with the heat map This is the S&P 500. So the S&P 500 is generally, I think, what people think about when they think of the market, quote unquote. It used to be more the Dow Jones was an often thought about and quoted measurement of, quote unquote, the market. There's many more stocks than the S&P 500 or the Dow Jones, which is simply 30 stocks. So, you know, this gives us kind of a sense of the overall market, how it's doing the economy. It's a benchmark for that. There's lots of nuances and nooks and crannies to the economy and the markets, but this is one way to look at it. So when we look at the S&P 500, it is what we call a cap-weighted index. A cap-weighted index means that the bigger companies get more credit. And with a cap-weighted index, we tend to get things like we're seeing right now, which is a very...

Daren:
[2:23] Lopsided market, right? And I think this chart perfectly displays that lopsidedness. So we have this thing called the Magnificent Seven, which is Microsoft, NVIDIA, Apple, Amazon, Google, Meta, and Tesla. And these are the stocks that have really driven the market higher substantially in the last few years.

Daren:
[2:42] And we're continuing to see that, especially with the Stargate announcement with President Trump this week, where we're going to be investing heavily in AI, brought together a bunch of business leaders in the AI space and said, hey, we're going to do this and really get behind it, along with them saying that we're going to make the US one of the crypto headquarters of the world or the crypto headquarters of the world. So you get stocks like NVIDIA right here, which is this big green box that is actually larger now than the entire rest of the financial services industry, right? So the S&P 500 is made up of 11 different sectors. And those different sectors tend to do well at different times in the marketplace. And right now you've got NVIDIA, Microsoft, Apple, three stocks that are all bigger than the entirety of the U.S. Financial system. Or even more wild to think about, this is the energy sector right down here. And these stocks are all bigger than the entire energy sector, let alone the biggest oil companies in the world, XOM. So not too long ago, XOM on this chart would have been the biggest company, the largest company on the S&P 500. So over time, what we see is these companies come in and out of favor, depending on what's going on economically in these boxes grow and shrink. And so a cap weighted index means that Microsoft, NVIDIA, Apple, Amazon, Google, Meta, Tesla have more of an outsized impact on the market.

Daren:
[4:10] So when you think the market, quote unquote, or the financial media is quoting the market, these main stocks, the Magnificent Seven are driving that, right? So how those stocks do is really important for the overall index. And because all those stocks drove higher this week, we had a nice improvement and we closed the S&P 500 at an all time high. The only one that really struggled was Apple.

Daren:
[4:35] And there could be lots of reasons for that. But in general, we had a pretty nice week when we're just looking at the S&P 500. So next week, and this will be important because next week, there'll be a lot of talk about interest rates. And so what's the probability that the Fed's going to raise or lower the interest rates next week? And the CME group publishes this probabilities target rate. So for the January 29th meeting in four days, we're looking currently at a 97.9% chance that the Fed is going to keep the rates the way they are. So that means that the market is pricing in steady rates there. The market is not pricing in that the lower or raise rates, even given kind of the more the inflation numbers we saw coming out last week out of the economy that looked a little stronger than we had hoped. The goal here, bringing inflation down, right? So the big question is how will all these pro business, these tax cuts that President Trump's talking about and these deregulations impact the overall market? How will impact inflation? That conversation is really creating a lot of uncertainty, right?

Daren:
[5:52] Secondly, we had Trump come out this week and really go after the Federal reserve and say, hey, you need to lower interest rates across the board. Everyone needs a lower interest rates. And, uh, that was, um, problematic in some ways because some would argue that the, you know, that the, the politicians shouldn't have that much impact on the fed and the, the, the fed should be apolitical, which actually is not correct historically. But that has been at least the more recent precedent that the politicians should let the Fed do what the Fed does based upon their research and their dual mandate. Although Trump is calling for lower rates at the moment. So that will be something to watch here in the near future. We'll see how that goes coming up.

Daren:
[6:48] So let's see. So let's go ahead and take a look at the economic data that came out this week. And so if we're looking at the economic data this week, the big ones that came out, we were flash manufacturing PMI and services PMI. So these are the first numbers that kind of give us a sense of what PMI is. So this is kind of telling us what the health of the economy is. And those all came in pretty in target. A little bit higher unemployment claim this week, which was a surprise, and consumer sentiment down a little bit. But not a lot of big news going on as far as any economic data coming out. WAF, World Economic Forum, is meeting, which is where all the politicians and powerful politicians.

Daren:
[7:33] And economic players all get together and talk about what the future of the world should hold, quote unquote. A lot of controversy there, but that meeting took place this week in Davos, so that took up some of the media hype for sure. President Trump spoke at that, but he did it virtually and really took on the European Union for all their laborious regulations that makes it very difficult for businesses to succeed. That seems to be a running theme so far in the Trump administration, really going after these regulatory regimes that make it difficult for economic production. We saw that happen in California yesterday when he went after the California politicians for their red tape in helping individuals recover from fire who had been through the recent fire in Southern California. All right. So if we dive on into the charts for the week and look at the various charts, one I think really important piece of information this week, the dollar actually turned over, rolled over. So it looks like we're headed down south. We had a cross on the 9 EMA over the 20 period moving average.

Daren:
[8:51] And that tells us we're probably headed lower. We closed below the 50. Now that's actually good for U.S. companies. It's easier to export the dollar. It's actually good for tourism. I know being from Sonoma County, being in Sonoma, we've been fairly impacted by a strong dollar. And the reason for that is because tourists don't come over because it's very expensive for them to come over. And so that impacts wine country that's really been struggling from a lot of changes in the demographics and what they're consuming. And also we've had a strong dollar, which then doesn't bring in a lot of the travelers. So with a weaker dollar, that bodes well for the Sonoma economy.

Daren:
[9:31] And that's a positive thing. So we actually want to see that dollar weaker. The dollar gets too strong. It's really not good economically. So nice that that rolled over. And tightly related to that is the 10-year. And so if we're looking at this is what's called the 10 year to two year. So this is looking at the 10 year Fed Treasury versus the two year Fed Treasury. And that 10 to two ratio here is what we call the yield curve. And so this period of time here, this is called a yield curve inversion, which is one of the only economic indicators that thus far has been correct. Now we're wondering if it's still correct because it hasn't come true, but typically and historically when we get this inversion within 14 months, we're in a recession.

Daren:
[10:17] And we have not seen that yet. We are in the period of time where we're particularly on edge and we're in the danger zone because when the yield curve reinverts, that's actually when we see the recessions hit. And so that becomes problematic. What happens is the feds start lowering rates and that reinverts the yield curve because of some economic issues. And they're trying to slowly let the gas out of the, um, here to, to hopefully that doesn't happen. Um, but we are in the risk zone of a recession, right? We're in that area where historically this indicator has told us we're, we're headed for that recession. It's been a particularly long inversion. We haven't seen an inversion quite like this and as long and as deep in a very, very long time.

Daren:
[11:03] There's not really a lot of substantial research that suggests that because we had a long inversion that we'll have a long recession. But you can see other times in history. This is back in 2000, we inverted and back in 2006, we inverted, but then we reinverted and then we didn't get that recession till 08, right? We didn't get that until this area. It's this period of time that becomes the danger zone when it comes to the inverted yield curve. That's something we're watching really closely and trying to figure out this uncertainty that Trump is fomenting into the economy and all these changes coming out. I mean, the number of executive orders that happened this week is mind bending. And what concerns me from, you know, from an economic standpoint, not getting political, it's not a political statement at all. So please don't misinterpret it. But what concerns me about all that change so quick is there's always a downstream effect of any decision in life, right? Like, there's no decision that doesn't have an unintended consequence on some level. And if you make a whole lot of changes at once and really radically change things, there we develop unintended consequences, right? So what the unintended consequences of all the decisions and the change in government is. Happening, we won't know for some time, but there will certainly be some unintended impacts.

Daren:
[12:32] Because the Trump administration really has a, yes, they won kind of a mandate from the American people to make some changes. They don't have the majorities that they really need in the House and the Senate to push a lot through. And like we saw with Hague Sess nomination last night, who was now the secretary of the military, that took VP to come in and be the tiebreaker there. So I suspect we're going to see a lot of that. It's not going to be quite as runaway as people are saying. And I think we're going to see a lot of people jumping on either side of the aisle and a lot of political maneuvering to get this stuff through. But the Trump administration really only has 16 months to get all this done. Because once we start hitting the re-election cycle. Everybody's behavior will change from a political standpoint. And historically, so when you had, quote unquote, a red or blue wave, it's gone the other way coming into the midterms. So you're going to see these rapid changes coming at us. The question is, what are the unintended consequences? How does that impact everything? Speaking of consequences and what things are happening. Um, when it comes to oil, um, oil did break out and, um, we saw that breakout in oil happen.

Daren:
[13:51] Over the last few weeks, but then we saw a rejection. And that rejection, ultimately what that tells us is that oil wasn't going higher. I suspect that the reason that the breakout happened and then got rejected was because things are seeming to calm down. Trump certainly doesn't want war. He's a businessman and war isn't good for business. It's good for those who bail bombs and guns and bullets, but it's not good for everybody else. And so we're seeing that calming down in the Middle East. We've seen a ceasefire hold with Hamas and Israel so far. We certainly haven't heard as much with Iran, although there is some heating up that they're getting close to having a nuclear weapon. So I would expect Israelis to start really acting on that.

Daren:
[14:39] But it does seem that Ukraine and Russia are coming to the table on some level to solve the war. And we're starting to see that at least with the rumors being that Zelensky is wanting.

Daren:
[15:01] So the it So it'll be interesting just to see if Zelensky really wants peace, if Putin really wants peace, because Putin also is saying, well, hey, yeah, maybe we could look at this and whether or not that peace happens or not and at what cost, right? It could be pretty significant. So we'll be watching that closely, but that bodes well for oil, right? Because if we do get peace, then oil starts flowing, that can stabilize prices. And in addition, Trump passed a couple of executive orders this week, opening up ANWR, which is in Alaska.

Daren:
[15:38] So it looks to be the case that oil is really going to flow again. What's interesting, at least here in the US, what's interesting about this is given all those announcements, the oil companies actually got hit. Pretty good. And you can see down in the energy sector here that the oil companies weren't doing as well. So there's this kind of thing, and this is what makes it difficult with the markets is, oh, Trump's in, he's pro-oil, he's pro-historical energy, not the green energy, and therefore all the oil companies are going to do well. It was actually the opposite in his administration. So we're trying to guess what's going to do well because of which politicians in is a fool's errand. It doesn't usually work out well, and we certainly saw that in the last election or last time that Trump was through. All right, so just look at the VIX. The VIX is a measure of the complacency and volatility, so how volatile or how complacent are the futures traders on the S&P 500. And you can see right now a fair amount of complacency.

Daren:
[16:40] It's getting low again. Typically, when it gets low, it gets a bounce. I do suspect that this week we've seen kind of this honeymoon period happen and then things start getting messier quick, right? Like you don't make all the changes that Trump is making and firing all the people that he's firing and doing the things he's doing without pushback, without people saying, well, hold up. We're going to, you know, we're going to contest this citizenship executive order, for example, and the Supreme Court. And so things are going to start locking down, like you get this first real move. But I do suspect we're going to see things get more difficult and there'll be more uncertainty happening as we move forward. And markets don't generally like uncertainty. Uncertainty generally spooks the markets, right? The markets like to know and they like to be comfortable with knowing what the next, what the future holds is to the degree possible, right? And the markets are incredible at discerning.

Daren:
[17:41] Uh, the littlest bits of information. That's why it's a fool's errand to try and time the market. Um, and you just have to pick your allocation, stick with it or utilize technicals, but, um, because it is just very, very difficult. The market is ahead of everything. The news is price often priced in. Um, so this is gold market. So gold doing really well, dollar weakness, tenure coming down, um, and gold going up. Um, we also saw some headlines with, uh, China, for example, really going all in on buying gold around the world and sucking up all the gold. And the feeling is that if the dollar, we keep printing like we are in the U.S., that what is the reserve currency of the world? And some would argue it's Bitcoin. Some would argue it's gold. Some would argue that maybe the yuan or another currency. But I really don't see another option other than the dollar that has as much trust behind it. So I think it's not likely that that's going to change in the near future. I do think that gold, though, and people getting a lot of gold gives them a seat at the table is the thinking behind the politicians, that the more gold they can buy and purchase, that gives them a seat at the table in the event that a new reserve currency usher comes in and replaces the dollar. I don't think that's happening anytime soon.

Daren:
[18:53] I do think people with the uncertainty will go more towards the dollar. I do think that Trump is really going to go after the BRICS countries that the past eight months have really been saying, hey, we're going to make the BRICS countries packed and we're all going to be a gold-backed currency, yada, yada, yada. I think he's going to start hanging those individuals out to dry pretty hard to the degree he can, right? And that's the big question is, was the Biden administration just soft or did they actually understand something that Trump doesn't? Or with their softness, people took advantage of that. Or can Trump come in here and be really aggressive and make a substantial change? We shall see, right? I don't think anybody knows, but that will definitely be an interesting thing to watch. Let's look at the bond market.

Daren:
[19:42] The bond market is infinitely bigger than the stock market and has had a brutal, brutal couple of years, absolutely brutal couple of years. Anyone who was diversified, who was less risky, has really not felt the love from the bond market. If a typical, investor in their retirement years is somewhere in the 60, 40, 60% stock, 40% bonds. And that whole 40% of the portfolio has just been brutalized. This was 22. And then it went sideways for a year and then started coming up and has done well. And I would say I'm still fairly constructive on the bond market. Chris and I spent the last three days with a large bond manager. So one of the largest bond managers in the world, listening to their economists, listening to their approach and their thoughts about the bond market. And I would say generally, they're pretty constructive. People feel like, hey, the bonds are the opportunity because they've been beat up so bad. But at this point in order to buy bonds, you got to almost hold your nose. And I think that's what we experience. I would say overall though, on this chart pattern, you found support on the 100-day and the 50-day this week. You found that support, that quick buy here. I think that's promising. We'll want to see if that bounces and continues though, because that downtrend continues and we lose the 100, which is the gold, and the 50, which is that green moving averages, then we see further down side on the bond world.

Daren:
[21:07] I think it really depends on what happens with the Trump administration and some of their policies and the way in which they go at stimulating the economy.

Daren:
[21:20] Right now, it certainly appears that they're getting all in on AI, which is just pushing these NVIDIAs that have been really driving the market even higher, which isn't, I don't think, particularly long-term, very healthy.

Daren:
[21:34] NVIDIA sucked up so much oxygen in the room. I think at some point, we get a blow-off top, on nvidia i just don't know when you know it could go a lot higher before we get that blow off top and that's the hard part of it all right you just don't know um i suspect that um ai is on the s curve and what do i mean by the s curve that there'll be this like relative adoption right now um it will start changing things but it'll be like the internet in 2001 and then we'll have some sort of breakdown crash and then it really will change all of our lives so substantially in a way that i just don't even think anyone um could honestly perceive at this point um the more i listen to different thought leaders on the ai space and talking um i think even they admit that we probably underestimate their under mistake and the impacts ai is going to have on the world and the um sam altman who runs chat gbt he was quoted as saying this week that ai is going to force the social contract to change. And that's pretty scary when you think about it. It literally will revolutionize society and how we interact one with another. So the 10-year now also got rejected at that long-term uptrend line. It could keep going up, but under this relatively so under this trend line. 10-year gets much into the 5%. There's a lot of issues that start happening. And it's also about how fast it goes up there.

Daren:
[23:02] But I would say that, you know, from a chart perspective, you could say, well, maybe we're starting to see a triple top here. And then there's your neckline. So if this goes down and breaks below there, we'd have to see a pretty sizable recession, I think, to get it to drop like that. I think it's more likely that we get this slow burn kind of move at this point. And that would actually be better. We don't want that 10-year to drop too fast, too far. The Trump Congress.

Daren:
[23:30] Coming out and saying, oh, we need to get interest rates lower. Be careful what you ask for because that thing goes down too fast. Then that also can create other issues in general. Let's just talk Bitcoin for a sec. Lots of talk in the media, lots of talk with the politicians around Bitcoin and a Bitcoin strategic reserve. So what is a strategic reserve? Well, we have an oil strategic reserve that the Biden administration spent down to keep the oil price stabilized during the Russian invasion of Ukraine and over his administration.

Daren:
[24:09] Strategic Bitcoin reserve would be much similar to China buying up all the gold or us buying up gold with this thought that the dollar's reserve currency might actually no longer be viable. If Bitcoin becomes one of the ways in which a store of value is created in the world, which certainly is a way so far, but is the way per se, a strategic Bitcoin reserve would give us a seat at that table. So there's a lot of very wealthy people pushing on Trump to make that happen, which would then be crazy for the price of Bitcoin. And I think that's what's driving, for the most part, the Bitcoin market. And you You can see like that's a very bullish look right now.

Daren:
[24:55] You can see it's flirting with this breakout. We've got a double bottom there. We're right at neckline. So this is the neckline of that double bottom. So if we break out of this current pattern, I would suspect that we would probably see, let's call it something like that. And if we were to extend that. And so if that's our breakout and we extend that above, I think we easily could tap on the door of 110 to 120 if we just break out of where we're at right now.

Daren:
[25:38] So we shall see in the next weeks ahead. A lot coming at us from lots of different directions.

Daren:
[25:46] What's certain is that we are uncertain and thus again why keeping, focused on good investing principles is so critical principles of diversification principles of i'm not trying to time the market principles of staying the course to your investment strategy that aligns with your overall financial planning and estate goals so with that i'm going to leave it there. Have a wonderful weekend, everybody. And as always, reach out if you have questions. Take care.

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