January 10, 2025 – Craig Johnson at Piper Sandler joins Financial Sense Newshour to discuss the current state and future direction of the stock market. Craig and Financial Sense's Jim Puplava look at the current market pullback, the implications of rising 10-year bond yields, and the potential effects of the Trump administration's pro-business policies. Johnson highlights concerns over concentrated gains in the "Mag 7" tech stocks, which he believes will lag in 2025, and the possible unwinding of the carry trade due to rising Japanese bond yields. They also touch on consumer spending trends post-Covid, the impact of economic policies on market sectors, and Johnson's optimistic outlook for small-cap stocks and the S&P 500 in 2025.
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Transcript
Jim Puplava:
Well, the markets are off to a negative start for the year. Is this merely a correction or the beginning of something bigger? Well, let's find out. Joining us on the program is Craig Johnson from Piper Sandler. Craig, looking at the markets where they are right now, on the day you and I are talking, the employment numbers came out much, much stronger than anticipated. On top of that, we've got treasuries; the 10-year is over 4.75%, and we're just less than 5 basis points on the 30-year from 5%. So what's your take here?
Craig Johnson:
Well, Jim, a couple of things. One, happy New Year to you and to all the listeners out there, first and foremost. And I hope everybody out in California stays safe with all the fires. Certainly, here in the Midwest, we'll be thinking about you for those reasons. Now, in terms of the markets itself, we've seen some pullbacks, but let's put this into perspective. If we look at the Dow Jones Industrial Average, it was only 37 days ago that we were making all-time new highs. If you look at the S&P 500, it was only 35 days ago they were making all-time new highs. And we've pulled back, you know, 5 to 10% in terms of some of these indices, Jim. But at the end of the day, I still see that the primary trend is higher. And when you look at the weekly charts, trends are still up. They're under pressure, but they're still up at this point in time. And when we put this into the context of 10-year bond yields, I think this is sort of the linchpin to the discussion for the narrative for a lot of investors right now. I don't recall having these many conversations with investors about 10-year bond yields. Here's my take: Simplistically, Jim, is 10-year bond yield moving up, kind of violating that downward-trending price channel, a sign of inflation, or is it a sign of strength? In your old economic textbooks, you'd come back and say if 10-year bond yields are going up, the economy is probably getting stronger. And that's sort of how I would interpret this message. But that isn't how it's being interpreted by some of the folks across Wall Street, Jim. They think it's a sign that the Fed is in a box, that rates are a sign that inflation is still a problem at this point in time. And again, if I look at the trend of CPI and PPI, you'd say, well, inflation has been coming down, and I think that is ultimately, Jim, why we've now got to turn our attention from the jobs report of today to the CPI and PPI reports that are coming out next week.
Jim Puplava:
Do you think, Craig, some of this is anticipation of the pro-business policies of the Trump administration, maybe extending the tax cuts if not more, and a pro-business environment that should hopefully stimulate the economy and the market as well?
Craig Johnson:
Some of the policies that have been discussed should be stimulative in nature, and again, I'm not trying to take a political side here, but it should be stimulative, is what it should ultimately be.
Jim Puplava:
As you look at the markets over the last two years, we saw double-digit 20% returns in the market. But Craig, so much of that was dominated by what we call the Mag Seven. So, I mean, at least in my lifetime, I've never seen it. You would have to go back to maybe the 70s with the Nifty 50. And I'm taking a look at some of these recommendations; I've seen valuations predicting Apple will hit $350, a $5 trillion dollar market cap. Does that concern you in any way that so much of what has happened in the market has been built around this AI and these Mag 7 stocks?
Craig Johnson:
Well, there has been a concentration in a lot of those names, no question about it. But I think what concerns me is if we do continue to see Japanese bond yields continuing to work their way higher, we could be in for another period of time where we squeeze the carry trade just a little bit. If that does happen, I do think some of those stocks, such as the Mag 7 names that have been sort of the beneficiaries of a lot of that money, that cheap money coming over from Japan to the U.S., will probably come under a little bit of pressure, Jim. And I think that's where my concerns lie at this point in time, watching that carry trade to see if it starts to unwind.
Jim Puplava:
Is there any concern in terms of what the Fed may do, or let's say interest rates go higher? Because we're seeing something that at least I haven't seen in a while, a decoupling of higher interest rates and a stronger dollar in gold. Gold is going up despite high rates and a strong dollar.
Craig Johnson:
Yeah, we are definitely seeing some unusual trends there. Those are things we have not historically seen. And so that comes back and again begs the question of what is the meaning of 10-year bond yields right now? Is it a meaning of strength, as you suggested, with some policies from the new administration coming through, or is it a sign of inflation? Is it a sign that investors are trying to run to the sidelines at this point in time? I'm not so sure it's all a negative at this point in time. I do think that the stronger dollar is probably the natural reaction of what we're going to see if we do see some tariffs get put into place under the new administration. I think it is also potentially a headwind for these big multinationals, Jim, which again, could be a beneficiary for small and midcap stocks with a little bit more of a domestic focus as some of the manufacturing does come back to the United States. So again, trying to unpack the meaning of this has become a very, very difficult narrative and message across the market right now. But again, I'm sort of looking at this and saying, hey, we've corrected a little bit. The primary trend is still up. Trying to really understand the meaning and get the rest of the street to understand the meaning. But again, with $36 trillion in debt, I think a lot of investors are sort of taking the approach, "We can't get this wrong." We can't get this wrong. The Fed cannot get this wrong because there is such a high debt level and sort of a high interest payment structure that we have right now in the country.
Jim Puplava:
Yeah. One of the things that really struck me, Craig, and I don't know if you feel the same way. If you take a look at 2016 when Trump came in, the deficit was smaller. Oil prices were around 40 to 50 dollars. You had interest rates were at zero. Fast forward to where he is now, eight years later. We're going on $37 trillion in debt. Interest on the debt has taken 20% of tax revenues. Oil prices are in the low 70s, and interest rates are at 5%. It's a different type of environment. So, you know, some of the expectations and things he may want to do. I just wonder if somewhat will be limited by just the structure of the debt itself and the amount of debt that has to be refinanced.
Craig Johnson:
Well, Jim, I don't think he's unaware of these issues. And I think that is why there was a comment that came out in the last day or two where he may declare an economic emergency in the country given the fact that it is 20% of our overall taxpayer revenues at this point in time, and spending does need to get kind of reigned back in, and we do need to address this deficit. And I think perhaps that comment from him is leading to some of the uncertainty. But I also think that some of his other comments are kind of red herrings to a degree. Whether it's a discussion about the Panama Canal or whether it's the discussion of Greenland or Canada or some of these things, I think he's enjoying sending the media running frantically around into these issues while he's addressing more important issues here at home.
Jim Puplava:
So, outside of a potential reversal of the carry trade, any other risks on the horizon that would alter your perception of where you think the market goes this year?
Craig Johnson:
Well, the key point for me is certainly going to be where 10-year bond yields go. If 10-year bond yields start breaking above a 5% level, that is going to be a headwind for some of the small and mid-cap stocks. I have said that I think that the Russell 2000 is going to outperform the S&P 500 in 2025. And if we don't see rates come in a bit, if we don't see the inflationary numbers come down, that is going to challenge the Russell stocks because there's a lot of long-dated securities in the Russell 2000 index, whether it's financials, whether it's in healthcare and biotech. Those are some of the areas where there's a lot of exposure. And that would be again a headwind if we do see the rates continue to remain sticky and at elevated levels.
Jim Puplava:
One of the positive things on small caps is if he gets his tax cuts through, and one of them is lowering the corporate tax rate to 15% for domestic producers, which I think would favor a lot of the small-cap stocks. And we saw, Craig, when he passed the 2017 tax bill, what that did to corporate earnings by lowering the tax rate from 35 to 21. So maybe that could be something that's favorable.
Craig Johnson:
Absolutely, it could be. But until we see that legislation getting close to the goal line and getting passed, I know he'd love to get one bill done, get it done fairly early in his administration. One big bill with a lot of these changes done, as he puts it, or I think he actually called it "one beautiful bill." But until we get to that point in time, Jim, there's going to be a lot of uncertainty, a lot of question marks. Investors are going to remain nervous about 10-year bond yields going up. There's a lot of floating rate debt, especially on the private credit side of the world, that is only going to further squeeze. You also have, from a homeowner perspective, 30-year mortgages are going up. You also have a lot of individuals that have home equity lines of credit that are also now going up. Those are all floating rate debts. And I think the new administration understands how painful, how difficult it ultimately is to have rates go up. But that is going to be the challenge, Jim. But if we contrast those negatives with a positive look at what's starting to happen with some of these consumer cyclical stocks out there, you're starting to see things like some of the cruise lines doing very well. You're starting to see other companies inside of the consumer space, restaurants, other areas, starting to pick up in terms of performance. If we are at the early start of a new cyclical move higher, call it a bull market, then you would suspect that these cyclical stocks would be doing well. And you're starting to see the evidence of that happening now.
Jim Puplava:
You know, along those lines too, during Christmas, it was the first Christmas I actually went to the malls because everything else was done on Amazon coming out of COVID. But Craig, whether I was going to the malls or going out to a restaurant, the restaurants were packed, the malls were packed. So right now, it seems like the consumer is in fairly good shape, at least I would say. People that own their own home, they got 401(k), you know, their accounts are going up, their housing values are going up, which gives them a propensity to spend.
Craig Johnson:
Yeah, I think consumers feel like they're still in a pretty good spot. I mean, a lot of people that have owned their own homes were able to lock in their mortgages at very low rates, very low rates. A lot of them, three and change for 30 years, they're at a great spot. That's probably not going to help the business in terms of the retailers at this point in time, in terms of selling homes and doing those kinds of things. But at the end of the day, the consumers seem to be okay. There's not a lot of firings that are taking place. The unemployment rate is coming down. And I think as long as people are employed and, in their homes, they're continuing to spend at sort of a normal pace. They're kind of paying those higher rates at this point in time, Jim, because, well, they can. And maybe they're becoming a little bit more selective. But overall, like you said, everything's busy. Every seat on the airplane is full. And we saw that with the Delta numbers that just came out this week too.
Jim Puplava:
And how much, Craig? You know, we had 0% interest rates for almost 13 years. People refinanced their homes; you got that 3% mortgage. Corporations refinanced their debt. How much that played into the Fed jacking interest rates from, let's say, 50 basis points to over 5 without really damaging things? Because if you had your 3% mortgage, it didn't impact you. If you were a company and you refinanced your debt at low levels, that didn't affect you as well.
Craig Johnson:
Agreed. I think people have been more responsible. I think people have certainly locked in a lot of those rates, took advantage of those things. And some of the Fed's tools weren't quite as effective at just changing the big lever of Fed policy rates. And perhaps that's why they've moved to other programs such as quantitative easing, quantitative tightening over the years. And the quantitative tightening program, Jim, they have talked about as potentially sort of slowing down a little bit as you get into 2025. So, if that's the case, that would mean that you would actually see yields start to come down, which would be an outcome from them sort of walking away from some of that quantitative tightening.
Jim Puplava:
So given these macro things that we've been discussing, where do you see the stock market? If we were having this conversation December 31st, what's your target?
Craig Johnson:
Well, in terms of December 31st, 2025, I'm hoping that you and I can have that discussion in person in 2025, Jim, is what I'm hoping when I make my next trip out to come see you guys. But for the S&P 500, 6600 is a pretty reasonable sort of place to go. We built that off of the same sort of framework and model that we've done over the years to earn the respectful name of Bullseye Johnson from that perspective. And again, that's sort of only high single digits, low double digits from where we are right now, Jim. It's not a huge stretch. I do think that the street has gotten a little bit ahead of themselves looking for 7000 or high 6000s from this perspective for the S&P 500. I think it's going to be a more moderate year. And again, if you go back and look at history, you look at the third year of every bull market, the average and median return is just over 5%. So again, it's going to be an okay year, but it's not going to be what we saw in 2024 and 2023 where we had back-to-back 20% gains. I don't see that happening in 2025.
Jim Puplava:
What looks good to you from a sector point of view, still at this point?
Craig Johnson:
From a sector viewpoint, I want to shift down cap; number one is what I want to ultimately do because I start seeing a lot better opportunities down cap. But in terms of sector perspective, we are still overweight financials, we are still overweight industrials, and we still think technology is going to do well, just not the Mag 7. We continue to brand that as the Lag 7 at this point in time. Then, on the weaker side of things, Jim, when I go through and I look at the basic materials, I go through and I look at staples, those still continue to look quite a bit weaker to me, along with some parts of the transportation sector itself, Jim. So again, for us, the same sort of three overweights, three underweights, six neutrals. And I would love to see some sort of improvement in healthcare, Jim, in 2025. Just not seeing that in our total return relative strength work yet.
Jim Puplava:
What about, Craig, utilities? They were kind of, you know, widows and orphans' stocks. And then all of a sudden, AI came out, and we have all these huge data centers which require an enormous amount of electricity to run. And utilities are growing again, which is something we haven't seen in decades.
Craig Johnson:
Yeah, utilities are getting a little bit of a pickup in the base load at this point in time. What I would say, Jim, is these are regulated industries, okay. There's a lot of capital expenditure that needs to go into them. There are very, very long timeframes in terms of adding new transmission lines, in terms of adding new production. I don't see any sort of large-scale nuclear power plants coming online in the United States for a long, long time. In fact, Savannah River was one of the latest ones to come online, and that was many years overdue, and it was also very much over budget. So, I don't think a lot of CEOs are going to take on the risk of adding new nuclear power plants now. Could they go with some of the small nuclear modular stuff? Sure, that is definitely a possibility. But expect a lot of red tape and expect a lot longer time frame to get that done than people think. I sort of question why utilities have run as far as they have in terms of yes, we need power, but at the end of the day, there are so many different pieces behind the scenes to actually deliver that power. It's going to take a lot longer than people think.
Jim Puplava:
What about things like natural gas and let's say the precious metals at this point?
Craig Johnson:
Well, let's take the precious metals first. Gold has been breaking out, has been very strong, has been doing well. That is a trend that doesn't look like it's slowing down. The question is, what is the meaning of it? Is the meaning of it that we've got inflation? Is the meaning of it that we ultimately have a more risky environment? Not 100% sure what the meaning is, but if you just step back and look at the trend, the trend is your friend. And the trend is still higher for gold at this point in time. And it's certainly a trend that I wouldn't ignore. And then in terms of natural gas and even gasoline at this point in time, natural gas trends have been a bit stronger in here, but again, the longer-term downtrends have been a little bit of a challenge for some of the natural gas. There's plenty of natural gas in the country, and I think under the new administration, there'll be a lot more drilling activity. It will pick up. I know that a lot of the energy companies have been pretty disciplined in terms of how many wells they've been drilling and those kinds of things over the last handful of years, but I really do think that you will see the natural gas producers pick up. But again, there's a big difference between those natural gas companies, Jim, and then looking at the energy sector itself, because if you look at Chevron, you look at Exxon, it is just not relatively outperforming to the same degree as what you're seeing with a lot of other parts of the market, whether it's technology, financials, or industrials at this point in time. So I sort of look at energy and say, I need to see more evidence of a trend change here before I get really excited about energy.
Jim Puplava:
Well, hopefully, Craig, we will be having this conversation over a nice glass of wine and a steak come December. In the meantime, as we close, if our listeners would like to follow the work you guys do at Piper Sandler, how could they do so, Craig?
Craig Johnson:
Well, they're welcome to shoot me an email at craig[dot]johnson[at]pipersandler[dot]com and happy to add them to our friends and family list.
Jim Puplava:
All right, well, listen, I want to wish you a Happy New Year and look forward to talking to you once again.
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