It's All About The FED...Still

Dano:
[0:03] Welcome to On the Markets from Sonoma Wealth Advisors. My name is Dano. We're joined this week by Daren Blonski, CFP. Just Dano. and Daren this week. Chris is off for the week for spring break. And Daren, we're going to start with the Simpsons meme. And we're going to start with the vibe in the room. Read the room. What is happening right now in the markets and the economy? A little bit like the Simpsons when if you were saying something to the driver, You got all kinds of things to say. You're a kid in the back of the bus and the driver would just reach up and tap the sign that says, do not talk to driver. Kind of the same thing right now. Trump wants stocks down. Bessett wants stocks down. Powell wants stocks down. You know that you can, you can be all upset about what's happening, but ultimately that's kind of what they're trying to do is boil out some of this inflation.

Daren:
[0:51] Well, that's, I mean, get some of the inflation out, right? Because that was the, the, one of the primary mandates, um, through this election. But, you know, there's a lot you can't do when you have rates as high as they are. So we're going to dial into all the rates and we're down to the markets and what's going on out there. Interesting week from the Fed. It's still all about the Fed and their dual mandate

Daren:
[1:14] of full employment and keeping inflation under control. So we'll talk about that and what we see coming next right after this.

Music:
[1:23] Music

Daren:
[1:59] All right. So yes, we're missing our buddy Chris this week. His kids are on spring break. So he's chasing little ones around somewhere. And we're covering the show for him today. It's Friday, March 21st, 2025. Five uh one of the hot topics has been what's going on with the change in the administrations and how that all is getting pulled through the economy uh one i think just piece of data right like there's a lot of media out there nobody knows who they can trust left right up down who knows uh and so we have to go back to the data and i like to go back to the data rather than the propaganda coming from both sides because our job is to sort through the noise and to help you be clear about what might come in the markets and how to best plan for your future. Again, this is an advice, but hopefully it will help you contextualize some of what's going on out there.

Daren:
[3:01] I wanted to show this chart today because what this is showing on the dotted lines is the federal expenditures and what typically is spent compared is being spent by the federal government in 2024 versus how what's being spent right now. And we actually have more federal expenditures right now. We're spending more money at this time this year than we were last year. And I think that's important because there's all this talk about less spending going on out there. And as I've mentioned on the show many times, I contend that one of the most positive things you can count on for your portfolio is the fact that no president, regardless of what side they're on, can afford not to print money and to ultimately stimulate the economy. Because don't confuse yourself. This market, this economy is grossly addicted to the sugar high of printing money. And in fact, Besson came out this week in an interview, was saying like, look, the markets are addicted to printing. This big spending money world, and it's going to take some time to get that addiction under control. I question why or not they even will have the political will or the political capability to do that. This slide certainly shows us that, well, not anytime soon.

Dano:
[4:22] After all those cuts, after Doge, after everything supposedly that's just been slashed, showing that this year actually still outpacing last year, which then makes the idea of this doge dividend, which people are floating out there, so ridiculous.

Daren:
[4:40] I mean, that's the other thing you have to keep in mind, that as the debt continues to spiral out of control, because the interest rates are so high, there's just no reasonable way that the costs or the payments that federal government is paying doesn't go up because the interest is up. So that's why Besson and Powell and Trump, they all know they have to get the rates down because the cost of our debt right now is out of control. And the only way to really get that under control in the short term is get the interest rates down lower and that specifically the 10 year. And so when we talk about the 10-year, this is a chart of the 10-year. And what you're looking at here is this kind of sideways winding we've been in for quite a while, going all the way back to July of 2023, peaked above it right here in the end of 2022. And then we've just kind of stayed in this channel. And when you hear Besson talking about getting rates down, he's talking about getting this chart to go down here. And one of the only ways they can do that is to slow the economy and get the Fed to lower the federal funds rate. And so in a way, you would think that some degree of a slowdown is important in order to get that interest rate down because the cost of our debt is very expensive.

Daren:
[6:02] So when we look at all that being said, when we look at how people are saying they feel about sentiment in the markets, there's a lot of bearishness right now out there. And you can see we've been hanging out in the bearish zone for quite a while. The historical average, though, being 31%, we're at 58%. So lots of bearish feeling out there. The good news, bad news about that is it's usually a contrarian indicator, right? So typically when people are feeling very bearish, it's actually a great time to buy in the market.

Dano:
[6:39] Hard emotionally to do though right now. It's hard in 2008 to go and start buying foreclosures because mentally you're like, this is going even lower. But that essentially is what's happening in the market, yeah?

Daren:
[6:52] That's right. And this is just like a, hey, just so everyone knows, presidents don't actually control the market. So this is some interesting data looking at the S&P 500 annualized performance return under the Democrats versus the Republicans.

Daren:
[7:13] And, um, when you look at this, uh, it's not convincing one way or the other. Um, in fact, which is this kind of interesting, and this is not a political statement, but the typically, uh, you know, you would think, and based upon the media and the propaganda gets pushed out there, everyone says, oh, the markets do better with Republican presidents. That's not necessarily true. And this data is kind of showing us that, hmm, wow, there's no real consistent pattern here. And actually, when the Democrats are in, the annualized performance tends to be a little bit better than with the Republicans. And so it's not what you think, right? And that's not a statement for Democrats or a statement against Republicans. That's just a statement of data fact here. When we look at investing based upon who's in the White House, right? So the dark green is under all presidents. Had you invested in 1950 in the S&P 500, if you invested $1, you'd have $341 now. If you'd invested only under the Democrats, it's that light blue. If you invested $1 in 1950, you would have $44. And if you invested only under Republicans, $1 today, you would have $7. So the moral of the story is it doesn't pay to try and predict your investing based upon who's in the White House.

Daren:
[8:39] There's just, I mean, you could argue with this data that you're better off just to invest when the Democrats are in the office, but even better if you just ignore it all. And that's why I always say we have to disconnect our politics from our portfolio. Let me say it again. Disconnect our portfolios from our politics. It's detrimental to your portfolio to connect the two.

Dano:
[9:02] And just based on that last slide, Daren, it's so timely right now. Just like you are not going to be able to time your investing with a presidency. That seems a little silly, right? It would also seem similarly silly would be the idea that you're going to perfectly nail a March Madness bracket because I saw a stat from ESPN that 99.9% of the brackets they have are now busted because somebody beat somebody. I wish I had that handy. But there was an upset, and all of a sudden everything's changed. So you're not going to nail either.

Daren:
[9:40] Yep, that's right. So when we look at another slide to suggest, and so this is looking at S&P performance under Democrats and how the market performed since 1950 under the Democrats versus the Republicans. And the moral of the story is that it went up under both eventually, right? Like trying to pull your money in and out because the current person in power aligns with your politics is a fool's errand. and not necessarily a great strategy for investing. That's the moral of the story. We're getting a lot of calls, a lot of questions, a lot of fear out there when we talk to clients and we just keep going back to, look, you can't time it. It doesn't really matter what the politics are. The markets are more powerful than any president likes to think. Now, presidents always like to take favor with the fact that, oh, the market's up. It must have been my up because of me or it's down. That's because the last guy. But that's just opportunistic politicking results of buying and selling on who's in office. Again, if I didn't make the point clear in going back to that two slides ago, you know, $1 became $341 if you just stayed invested and you had significantly less returns if you pulled it out based upon politics.

Daren:
[11:08] I think I beat that dead dog, as they say.

Dano:
[11:12] One more time? Should I marry my politics and my investing? I didn't get that. I wasn't sure, Daren.

Daren:
[11:18] I guess it wasn't clear, Dan. No. So let's talk about gold. Big week for gold. Huge week for gold. Gold hit all-time high of $3,000 and seemed to hold it. I wasn't sure how it was going to do, but going into the close, it's looking like it's going to hold. We're seeing some weakness. And you can see on the chart here on gold, and this is the $3,000 mark. But I like this chart, right? If we look at support right there at $3,000, it went into, traded into support. And as soon as it went down into support, people bought it and it went up. So you can see that long wick candle right there in gold. And that's usually a good sign that you had that breakout, that test in resumption upward. That means there's still a lot of buyers right at the 3000 level. People are not saying, oh, I'm going to unload my gold now. I'm going to buy more gold.

Daren:
[12:13] And that's interesting, and I think one should pay attention to that. And that's usually a sign of a risk-off move, which would also seem to signify that we're going to see the 10-year come down, which would then also bode well for the AG index. We're waiting to see a kind of narrow breakdown. We had this NEAG, which is the bonds, right? And this is that part of the portfolio that has absolutely taken the life out of a diversified investor over the last few years. And you can see this double bottom here and then this neckline. And we broke, we went double bottom, we broke up the neckline, and we're right here. and we're looking to see if we're going to actually get a more significant breakout. That actually looks pretty constructive in the short term. And you can see in the long term, this was a huge double top we put in in 21-22. We've made a lot of headway back. When we actually look at the extent of this move using the Fibonacci lines.

Daren:
[13:21] You can see we're coming right up against that 75% fib line right in this zone right in here to complete this bounce so the fact that we're above the 61.8 we're holding that interestingly enough you can see it found support right on that 61.8 fib line right there and then bounced up above it and it's holding it I think that bodes well, On the flip side, though, if we look a little bit closer at this, let's put on a four-hour chart, you can kind of see it's kind of an ugly double top. I would almost argue, though, there's another double bottom in there.

Daren:
[14:02] You can see here that would be a double bottom, but we need to break out above this neckline here to really see it go higher. So I'd say that's positive, and I guess it's not positive. It's positive for people who are diversified. It doesn't bode well for the economy. It makes it seem like there's a slowdown coming or in place already. Gold going up, egg working up. And then we go back to that 10-year, which we talked about earlier. I would expect to see more weakness in this 10-year. On the four-hour chart, you can see this is kind of move down, trade sideways. I would expect to see this break out down further. Based upon that chart. A lot of support in this zone here on the 10-year. Why is the 10-year so important? Because that federal debt, everything's set to that 10-year note coming off the federal funds rate. So that's the market saying, here's what the current 10-year rate is that it'll pay for debt.

Daren:
[15:07] So I think if I just look at those pieces there with gold going up, all-time highs, strength in the ag, weakness on the tenure going down, I think you have to start to accept or make sense of a story that we're probably looking at a slower economy. Are we looking at a stock market implosion?

Daren:
[15:25] Not necessarily, right? The economy is not the market and the market's not the economy.

Daren:
[15:31] They can perform differently um ray j is one of the brokers out there um is projecting one of the biggest crops of new oil projects in a decade and this is a big reason and i talked about this a couple shows ago but you know i had many clients come to me like hey you know with if trump winning should i invest in oil and i was like well not necessarily because if you have all these oil fields getting reopened and oil projects happening, you have more supply. If you have more supply on the market, then price has to adjust for that supply. With things seeming to calm down in Russia and Ukraine to some degree, and I don't know if things are going to calm down in Middle East yet, seems like things are heating up with the Houthis. But with a lot of projects coming online, that seems more likely we're going to get more oil. And I've talked about this kind of windup we had going on in the chart. A few months back, and then we had this breakout, and then it got rejected, and now it's down hanging out right here in this super important support area. So geopolitically, there has to be something tied to around $68 a barrel.

Daren:
[16:47] You can see it's just been so important as support since 21, and then was resistance all the way going back in 2018. So it's a pretty important line in the sand for the overall oil markets. And there seems to be an equilibrium happening there along that area in that zone, call it 65 to 68 area. So if oil though starts going down, which this chart seems to suggest, the fact that it couldn't break out and break up and go up, that it got rejected

Daren:
[17:20] right here and then came back down.

Daren:
[17:22] That's telling me that, okay, well, you know, I'll put that on the side of the T chart for recessions on its way or here already, right? The things are definitely going to slow down. Is it going to be awful and bad? No, don't take it that way. Don't go there with it. I don't know. No one knows, but it does look like things are slowing down. The other side of the T chart, I would say is whenever we've had recessions in the past, there's been a, so this is the yield curve looking at the 10 year to two year treasury yield curve. And so this is an inverted yield curve when it drops below this green line. And you can see all these other inversions that have happened in recent history that very short after those inversions, we had a recession. And the recession happens when the reinversion happens, not when they actually have the inversion happen. So when it re-steepens, and it looks like it's re-steepening and to what degree and how fast and how significant we shall see, but it certainly seems that you put that on the side of the T-chart, that a recession is on its way or coming. Add the geopolitical stuff.

Daren:
[18:29] And there's plenty to suggest that there's some difficult waters ahead. When we look at information technology sector, the earnings per share has just gone through the roof. And Chris and I have talked a lot about this. Chris, being the value investor that he is, that type of investor really doesn't like to see these massive spikes in valuations. It doesn't make sense. From a fundamental standpoint. And so the mags, so the mags is on the Magnificent Seven. So this is an ETF that tracks the Magnificent Seven. And you can see that we just had this huge breakout and then they've just been going down. The only Magnificent Seven still holding onto its 200-day average, and I didn't check yet to see if it closed that way, was Facebook or Meta. But the The MEG's index that tracks the index of the Magnificent Seven had this huge breakout, and it's come back down in now. And this was the primary source driving the markets higher last year, creating excess in the market. What's this look like visually? Well, it looks like a heat map. Well, you know I love the heat map, so here's the heat map. We can't have a week without the heat map.

Dano:
[19:46] Merry Christmas.

Daren:
[19:47] Merry Christmas. That's right. And so this is the one-day performance, and you can see the Magnificent Seven, these big stocks here. That are bigger from a capitalization perspective than many other aspects on market. I mean, when you really think about it, Apple is the size of the entire financial services industry. That's bonkers. Oil industry is down here. The entire oil industry right here. And Apple is significantly larger than the oil industry. You could probably, even if you reorganize this, make an argument that said Apple is larger than the energy and the basic materials sectors combined.

Daren:
[20:27] And that just tells you how out of whack it is. The problem with that is when the markets are really out of whack like that, there has to be a rebalancing of things. Things have to come back in. In order for us to do that in a constructive way, we have to lose a lot of value in the Magnificent Seven while gaining it in all these other stocks. That's a very difficult transition to pull off. That's quote-unquote the soft landing everyone was talking about a year and a half ago. So whether or not that can actually happen, I question. And that's what I would argue is the biggest risk in the market is the fact that these big stocks have sucked up so much oxygen, you don't have a very balanced market. When you look at Apple price to sales from 2004 to 2025, you can see their price to sales is up at 10 times, over 10 times. And this, the five to one and a half times was where it was for a long time, and it just broke above that. So the question becomes, is that the new norm? Is price to sales going to be expanded for organizations like Apple indefinitely? Or does that come back into trend? And that's the debate amongst market watchers out there.

Daren:
[21:44] One thing we watch are mortgage refi rejections, right? That tells you how weak the borrower is getting. Why is that so important in the United States? Because the primary form of consumption Americans have is all the things we buy for our house. And if we stop buying for our house because we don't have a house or we stop buying houses and we're getting rejected on our mortgages, that becomes problematic. And you can see the rejections are up significantly. Credit card debts up significantly. I don't know if you saw this headline, Dan, but DoorDash is now offering fractional payment for DoorDash. So you can literally take out debt to get DoorDash.

Dano:
[22:23] A burrito on layaway.

Daren:
[22:25] A burrito on layaway.

Dano:
[22:27] Dude, that is asinine,

Daren:
[22:30] Man.

Dano:
[22:31] I can't pay later for your double-double. I just can't conceptualize it. And I think credit card debt, if it's not now, it was recently at an all-time high. And you've mentioned that perhaps a recession is coming. You and Chris have been talking about all of these recessionary indicators for the past two, almost three years. And so now it seems like it's all kind of coming to fruition, where it's perhaps been printed through to delay it to this point.

Daren:
[23:04] Well, that's my operating theory, right?

Daren:
[23:10] Because we actually had the fundamentals were in a place where we would expect a recession to be, and it didn't happen or hasn't happened. It's the longest time we've gone through an inversion and not had a recession, and we had the longest. So below this green here is the inversion. So that inversion happened in August of 2022. And the average duration from that inversion point to a recession is 14 months. And we went well past that this time and stayed and inverted longer. And the argument is that the previous administration was doing things, if we're good or bad, that's not a political comment, but was doing things to prop up the economy in an unhealthy way that now is coming to roost. What you saw back in 2019 right here, this was the COVID almost sent us into an inversion didn't happen. And we just turned on the printing press like crazy all through this period of time.

Daren:
[24:13] I mean, literally from 2019 to today, we went from $19 trillion in debt as a country. And now we're well approaching $37 trillion in just that short period of time. And just in this chart, you go back to 1989 on this chart. If we just take this chart as an example, or 1977, all this time up until 2019, we only managed to get ourselves in $19 trillion and now we're in 36 trillion.

Daren:
[24:45] Literally, the wheels are coming off the bus. And I don't think the general American population understands this.

Daren:
[24:52] And whether you like what Musk and Trump are doing, that's not the point. The point is that whoever's in that role at this point has to be thinking about this debt issue because it is a significant problem that we're facing as a country that needs to be dealt with. Otherwise, we're going to face much, much harder times, right? The hope is that it gets under control with whoever's managing it and that we can balance things out so that we can go on and have a golden future, quote, unquote. But I don't even know if at this point if it's possible. It's going to be very, very, very difficult. The amount of debt we took on through COVID was very significant. And we'll make that journey pretty tough. And so I think that's just something to keep in mind.

Daren:
[25:42] Dan, you were going to bring up Gene Hackman's $80 million fortune.

Dano:
[25:47] Yeah. So I saw this story this week and we actually just, we have another podcast called It's All Money, which you could find here on our YouTube channel. Make sure to subscribe if you haven't already. You could find that show on the channel. And we talked about estate mistakes on a recent episode of the podcast. And right after we release that episode, here comes a story about Gene Hackman. I'm going to walk you through this timeline, Daren, because the timeline matters. So Gene Hackman, very famous actor, obviously, he unfortunately passed away in February. His wife was also found dead. His wife, Betsy, was believed dead from hantavirus. Gene had Alzheimer's and died a week later. Then they were found. He died from heart complications. The estimate is that he has an $80 million estate, but the assets are undefined. We're not sure in what. Daren, he had a will from 1995, and that names his wife, Betsy, the sole beneficiary and none of his three kids. His wife, Betsy's will, has a clause stating that if she and Gene died within 90 days of each other, it all goes to charity. So basically, according to those wills, the kids are getting nothing.

Dano:
[27:02] He supposedly also has a living trust, but that wasn't publicly recorded, so no one knows the details of that. That was unusual. And then there's another will in 2005 in which Gene and Betsy both made each other the trustees on their own wills. So the family is now also blocking the autopsy because the timeline of who died when is actually mattering a lot and has come into question. So the thought is that the kids are going to challenge it. I only bring that up to say, this is an extreme example, but we often talk about estate plans and we talk about planning and the importance of planning. And this was just an example to me of, you know, it can get a little bit complicated and unforeseen.

Daren:
[27:47] It just reminds me that prince that you know prince died in test state with like 300 million dollars in his estate right and it just goes to show even the people that are loaded don't always plan them in.

Dano:
[28:00] Test state wait what i'm not i don't know that phrase what is

Daren:
[28:02] That that term is just you didn't have your trust done you didn't have your stuff done so then they the court has to decide crazy um yeah pretty wild so all right all that being said this go back to the charts get your estate plan people yeah yeah um so when we look at spy right so this take i want to i want to back out right and just step way back for a minute because there's a lot of fear out there right now and a lot of people really um pulling their hair out about the market and if we look back so this and just give us some context this is 2001 this is 2008 high, and this was the 2024 high 25 we'll call it and you this was this was covid high here this was covid drop and look and this is where we're at right now.

Daren:
[29:01] Given my take on that chart, stepping aside of all the emotions, it wouldn't be shocking to see a pretty significant sell-off at this juncture, given how hard we've moved up. Does that mean you should overreact as an investor or do anything? No, it absolutely does not. But it wouldn't be shocking just to see a period of time where things came down and then reset and went back up or went down further. I highly doubt the days are over and the thing completely collapses. I don't think that's likely, but I do think we're well due a correction. So let's take a look at how far we've moved in the last little bit, right? So the all-time high here was right up here on Wednesday, February 19th. And now we're looking at, we're basically 7% down.

Daren:
[30:10] So pretty decent drop, but not a crazy drop. And um so that's just something to kind of keep in context when you're really thinking about the markets that corrections happen corrections are normal um what i'll point out though is the fact that we dropped down here and you can see um that this area could be a short-term bottoming, What I don't like about this to say, hey, that is in fact a bottom, it definitely looks like it's a short-term bottom, but the bounce off of that bottom was pretty weak. When we look at the Fib lines, we only came to basically a 25% retracement and we're just floating around there. I really want to see a market bounce up to 38.2 or somewhere in that area if I'm going to say, hey, there's a strong bounce. And then we work up into the 61.8 zone.

Daren:
[31:13] So it's a weak bounce so far. I think that's something just to keep in mind and be aware of. I don't see it, the strength I want to see out of that. Again, going why I think we'll probably see a lower low out of this one, at least based upon the way the market reads right now, regardless of all the politics and the jibber jabber coming at us in the news. I talked about earlier the Magnificent Seven, and the Magnificent Seven are...

Daren:
[31:45] Struggling a bit. And that's really important for the overall market. So until those areas get figured out, I think we're going to continue to see weakness in the market. It's just going to take so much of the other stocks to do really well to make up for the AI bubble. We've been talking about this for a long time, and that is that NVIDIA, we felt like, was in a bubble. I think we're seeing that capping out of NVIDIA. It would not be shocking to see some of this get pulled out of the market. Just the way this went up, it almost fits perfectly with a bubble in the way a bubble looks from a chart perspective.

Daren:
[32:22] So I think that's important to watch those Magnificent Seven and what they're doing. The market will obviously follow. When we look at VIX, which is a measurement of volatility looking 30 days out, and we can see that settling down, that is a good sign to say, hey, maybe we are following a bottom. But what I'll say technically from the VIX, if we're going to get technical here, is that we really want to see it break below that kind of trend line before I'd say, yeah, that trend's done going up.

Daren:
[32:53] It's quite possible it's just building up volatility at this point. So all that being said, my read of the market, my read of the economy is we're probably entering or looking at or flirting with a recession. It would be totally normal. It would be totally normal to get some correction in here. Does it mean that people should go changing their portfolios and changing everything? No, because all the government has to literally do, and that could be the administration, or the Federal Reserve, is start printing money and lowering rates, and then we're back on. So like always, it's best to pick an allocation that works for your temperament, works for your comfort with volatility, and stay the course with your investments. Well, Dan, I think we're going to leave it there for this week um any final thoughts.

Dano:
[33:38] Yeah i just wanted to shout out all of our new subscribers on our youtube channel so we passed 3500 subscribers this past week we really appreciate you joining us i hope you're enjoying all the various content we have on the channel including two podcasts and more and um we look forward to even more improvements and upgrades over the next couple of months here on on the markets and those are coming forthcoming we're excited about those. But for now, you can learn more about all things Sonoma Wealth at SonomaWealth.com. And thanks for joining us. We'll see you next week.

Music:
[34:12] Music