more thoughts on the market

There are a number of reasons for thinking that next year will be a testing one for the US stock market:

–the market bottomed in early October 2022, so we’re in year three of an up market. History says that’s pretty long in the tooth

–the most important related issue, I think, is the aging of the workforce in OECD countries, coupled with general resistance to allowing in younger workers from outside. This is a classic shoot-yourself-in-the-foot move–growing the workforce is one of the two keys to economic growth (productivity gains, i.e. better machines, better education, is the other). Also, whether they realize it or not, newcomers would be tacitly accepting the burden of paying for the Social Security plans of aging locals. Brexit probably marks the pinnacle of this kind of economic stupidity–at least I hope so.

As a practical matter, the lack of more workers puts a lid at something like 1% annually on how fast the developed world can grow–meaning it’s much easier than it used to be for wealthy countries to tip into recession. This is second economic reason for caution.

Yes, the US is the young man of the group made up of the US, Europe, Japan/China. Still, being the best at using a walker isn’t the pinnacle of achievement.

–stocks aren’t cheap, as this long-term PE chart suggests. This isn’t the whole story, however, since PE is also a function of the price of the closest investment substitute, that is, Treasury bonds

–the incoming president’s most important credential is that he’s been elected twice to the highest office in the land. Prior to this epic achievement, he was best known for playing the role of a successful businessman on a TV show, The Apprentice, that ran for ten seasons. The biggest challenge he faced in his first term was, to my mind, the pandemic, a test I think he flunked pretty badly.

My guess is that either plank in his economic plan–shrinking the workforce and launching a tariff war–would be enough to trigger a recession if implemented.

All in all, playing defensively will most likely be the order of the day in 2025. If this were baseball, we’d be thinking about pitching and defense, not swinging for the fences.

more tomorrow